I should note that my post was not about B-Corp the company specifically (though… I do have one pending), but on what I see as a B-Corp movement, which is larger than B-Corp the company.

Jay, this is a lot to absorb. I feel like I could use a course on this because for years, I have avoided incorporation because of alot of these issues. Of course, I once got told the only problem with my business plan was that I did not want to borrow enough money to attract investors.

Hello everyone,

I'm one of the B Corp guys. More accurately, I'm one of 3 co founders of the nonprofit B Lab. i apologize in advance for the long post, but thought some clarification would be helpful.

B Lab's mission is to use private enterprise to solve social and environmental problems instead of relying on government and non-profits to do it alone. The central component of our activities has been to create an opt-in certification - called a B Corporation - to distinguish "good companies" from just good marketing. There are now over 280 Certified B Corporations from over 50 industries representing a multi-billion dollar marketplace (for now, almost entirely US).

The underlying qualifications for companies to become Certified B Corporations are meant to solve two issues identified today by entrepreneurs and investors as impediments to growing mission-driven businesses - social impact standards and mission-aligned growth and liquidity:

1. a company must demonstrate, in a comprehensive, comparable, and transparent fashion, its social impact by achieving a minimum score of 80 out of 200 on the B Impact Ratings System, which assesses its impact on its employees, suppliers, consumers, community, and the environment; and
2. a company must create long term mission alignment by committing, to the maximum extent possible under existing law, to consider the interests of the community, employees, and environment when making both operating and liquidity decisions.

It is in liquidity scenarios where the B Corp legal framework has greatest benefit for social entrepreneurs and investors.

Note that we are trying, on a strictly shareholder-voted opt-in basis, to expand both permission and obligation of the directors on behalf of the shareholders, not to provide rights or representation to non-shareholder third parties - our approach is about enabling the free market of investors and entrepreneurs, not about creating rights for third parties or new regulatory requirements for all companies.

The legal requirement for B Corporation certification is achieved in thirty-one states by incorporating those states' constituency statute language into the company's articles of incorporation as a "shall" requirement of consideration. In the nineteen states without such legislation, we have used a much weaker requirement of a board resolution or a commercial contract to consider other interests to the maximum extent possible under existing law. We have taken this approach in the non-constituency statute states, including Delaware, because we've gotten inconsistent answers from corporate lawyers and legal scholars about the rights of the shareholders to choose to amend a company's corporate articles to include language requiring directors to consider non-financial interests in both operating and liquidity scenarios.

The lack of clarity on this issue - and many companies' and investors' frustration with conflicting legal advice - is impeding the growth of an emerging market. This has taken us in two directions.

1. Attempt to provide clarity about what is and is not permitted under existing statute, particularly in Delaware, where most of these companies are incorporated and where their investors are most comfortable having them incorporate.
2. Create an alternative corporate form, called a Benefit Corporation, comparable in most ways to existing corporate statute, but with specific provisions to require directors to consider non-financial interests and to require transparent and standard reporting and accountability. Benefit Corp legislation was introduced in January in Vermont (S.263) by Senate President Peter Shumlin and Economic Development Committee Vice Chair Hinda Miller. Testimony begins this coming week. There is interest from several other states to introduce Benefit Corp legislation in 2010 or 2011 including Maryland, New York, Pennsylvania, North Carolina, Oregon, and Colorado.

While there are potential benefits to a purpose-built alternative corporate form (e.g. clarity, credibility, and a potential platform for policymakers who want to provide incentives to businesses that have obligated themselves to create societal value and have demonstrated that they have actually done so according to third party standards), there are obviously additional complexities and costs to interested companies and investors as well.

I'd be happy to provide more detail on the B Corp legal framework or the Benefit Corp legislation is folks are interested.

Hmm, how soon will the accounting profession get up to speed and I bet this will replace the growth of the LLC format in the US.

Indeed Michael. I'd assumed that there had been some influence in the creation of L3Cs from B-Corps and others and that this was like the UK CIC a formal legal interpretation.

I prefer not to use the term hybrid in that it seems to conjure up the immediate image of a conflict between two opposing ideologies. Instead, it's a lot easier to say that the objective of business is to return a profit and that those shareholders who elect to do so may render that profit to a social purpose. Hence profit-for-purpose as a busjness model which is liable for taxation in the same way that any other business contributes to the common wealth.

If there are to be tax concessions, I believe they should be given to those who invest in such business to yeild both a financial and social return on investment.

There's one important player I'd omitted in the evolotion of the social business model and that's the Nobel Prize winning economist Muhammad Yunus and the Social Business Enterprise model he described in his book 'Creating A World Without Poverty'

http://jm.ly/AxOBUL

To compound my already overlong comment, I had one other thought - While I still don't know of existing state legislation for a hybrid profit/non-profit corporation, the low-profit LLC already exits, it has limited liability and you could draft the LLC agreement to match any capital structure you might have wanted for a B Corp. On the tax side I believe most (possibly all) L3C's are structured for partnership (pass-through) taxation and then make the appropriate elections to get pass-through tax treatment. However I believe it is theoretically possible (with the right provisions in the LLC agreement and the right tax elections) for an L3C to get corporate tax treatment. In sum, L3C might be able to provide anything a B Corp could, provided the owners are willing to accept the basic structural premise of any L3C - the profit making activity can't be significant, the social mission has to be primary.

In the worldwide context the concept of a business charter modified for social purpose has gained wider acceptance. P-CED for example incorporated in the UK in 2004 under the rules of a company limited by guarantee which has no shareholders. In 2005 came the Community Interest Company as a formal model with a charter modified for social purpose.

B-Corps arrived with similar ideals around 2008 and by 2010 only a few weeks ago the original model of a trading entity with at least 50% of profit re-invested in the community became the eligibility criteria for the UK Social Enterprise Mark costing £750k of public funds to re-invent.

Jeff

The business judgment rule is a creature of state law as are the different types of legal entities (corporation (including not-for-profit corp) , partnership,limited partnership LLC, etc.). So far I don't know of any state that has created a hybrid profit/not for profit to accomodate the B Corp, although I understand B-Corp itself is seeking such legislation. Even with a traditional for-profit corporation or LLC, the shareholder/owners can probably give the directors/managers a lot of latitude to cede primacy to other stakeholders on specified issues if it is done so clearly in the charter and by-laws or llc agreement. The business judgment rule is there to protect the shareholders/owners, not thwart their will to achieve some theoretical objective of profit maximization.

The IRS will (in way too general terms) tax a business entity under one of three regimes 1. Partnership 2. Corporation 3. Not for Profit. Entitites treated as corporations get taxed as a separate entity. Entities treated as Partnerships are not really taxed, the partnership income is treated as distributed to the partners and the partners are taxed. Not- for- Profits are just audited, and taxed only if turns out they are not following the Fed rules for a 501(c)(3). The choice of which Federal tax regime will apply depends on the elections and the actual characteristics of the business entity, not just on its form, for example, a state limited partnership can be taxed as a federal corporation.

Typical B Corp would want some flexibility to make profit, plus limited liability. Under current law it would likely be a for profit corp or LLC for state legal entity purposes and a corporation or partnership for fed tax purposes.

I know of no proposed Fed tax changes for B corps or any profit/non-profit hybrid. Because deductions are limited to "ordinary and necessary business expense" this might actually be more important than state law legal entity issues. A book store that wants to spend money developing book recycling technology or researching the history of the printing press might run into some deductibility issues under current law, even if the expenditures are consistent with the charter and the wishes of the owners. The law around "ordinary and necessary business expense" is all about avoiding expenses (the dry cleaner's three week trip to Tahiti for a one day meeting with a flower supplier) that don't have much to do with making money for the business - the purpose of the "ordinary and necessary limitation" is to protect the Treasury from the owners, not to protect the owners from bad management so it is potentially the bigger stumbling block than the business judgement rule and the state legal entity issues. . ...

Hi Kevin; I will write more on this topic tailored to your question.

Kevin, accordinto what I've read B-Corps "Institutionalize multi-stakeholder company control by amending corporate bylaws to incorporate stakeholder interests"

Here's how it was expressed in the 1996 white paper I refer to above:

" The P-CED concept is to create new businesses that do things differently from their inception, and perhaps modify existing businesses that want to do it. This business model entails doing exactly the same things by which any business is set up and conducted in the free-market system of economics. The only difference is this: that at least fifty percent of profits go to stimulate a given local economy, instead of going to private hands. In effect, the business would operate in much the same manner as a non-profit organization. The only restrictions are the normal terms and conditions of free-enterprise. If a corporation wants to donate a portion of profits to its local community, it can do so, be it one percent, five percent, or even fifty percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object. But, if an arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no one will object. The corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of employees and community leaders."