1 of 2: B-Corp Poses Radical Change to CSR

Lately the CSR world has been abuzz with talk of "B-Corps". What is a B-Corp, why does it matter, and how can it make all your CSR dreams come true? This is part 1 of a set of articles on B-Corps.

Without even realizing it, most participants discussing corporate social responsibility are actually talking about corporate and tax law. Corporate law governs the way corporations must run; tax law incentivizes corporate management decisions and defines corporate entities.CSR is greatly affected, and limited, by both tax incentives and corporate law.

A 150 word tax and corporate law primer

The IRS forces people that make money to declare what kind of business they are. This choice critically determines how their tax treatment and potential legal risk. There are a range of flavors: sole proprietor, partnership, limited liability company (LLC), limited liability partnership (LLP), a limited liability limited partnership (LLLP), a cooperative (Co-op), an S-Corp and a C-Corp. Each of these forms of business requires different founding documents to be filed with the state. Founding documents such as the charter, articles of incorporation and bylaws describe the managements' fiduciary and legal duties to shareholders or owners.

C-Corps

You are used to C-Corps. These are the most common corporate form. C-Corps are taxed at a corporate rate as a company, and its shareholders are taxed again individually if they make money off stock or dividends (capital gains). C-Corps are popular because they are hard to sue and offer maximum financing options. If the business goes bankrupt, no one loses their personal fortunes; the business entity itself takes the hit. If the business gets sued, the board, management and shareholders are mostly protected from being held personally liable. This is untrue in most partnerships, where the partners are personally responsible the for business's liability.

B-Corps Attack Stakeholder Primacy

There is a widespread misconception that C-Corps MUST, as a matter of law, maximize shareholder value. The short story is that this isn't technically true; C-Corps' legal obligation is to exercise judicially acceptable business judgment. But legal nerdery aside, most businesses believe that their founding documents require that they make maximum profit for shareholders. This is called "stakeholder primacy" and is a controlling idea in current corporate law. Stakeholder primary is also the main thing keeping C-Corps accountable to anyone. This becomes a problem for creating lasting CSR programs; C-Corps can only legally do things they can justify with 'business reasoning', or else they are subject to a legal challenge from shareholders.

This is where B-Corps become relevant. The B in B-Corp stands for "Benefit", as in social benefit. The brainchild of CSR advocacy, and made official by B-Corp the company (more on that later), B-Corps are the movement for the IRS to create a new business entity specific for ethical, sustainable, socially responsible businesses. The plan is for the IRS to create class of tax laws for social enterprises, with unique tax benefits that incentivize the accounting for societal externalities by writing clear duties to stakeholders into corporations' founding documents. This approach creates a legal obligation to stakeholders on a similar footing to corporations' obligations to shareholders.

B-Corps are a type of company, and a specific company.

Part 2 of this series will discuss B -Corp, a company founded to create a network of B-Corps.