The Benefits of Being a Benefit Corporation

February 2017

Companies have always been valued primarily on a monetary basis, with success measured based on the strength of their balance sheets and cash inflows and outflows reported in their financial statements. The decision makers of these companies, typically a board of directors and executives hired by them, have the fiduciary duty to act in the best interest of the shareholders. The best interest is generally to maximize the monetary profits and company value. In recent years, many companies have chosen to broaden their duty to include employees, suppliers, customers, community, and the environment. Many boards and executives may be naturally inclined to balance the needs of all of these parties, but without a formal mechanism in place, they might have to forgo what they see as social and environmental responsibilities, if certain choices come at the expense of the shareholders. Otherwise, they could risk legal action questioning their motives.

There are types of organizations, though, that formally extend the duty beyond financial matters, and provide a fiduciary duty to social and environmental goals. These organizations are known as “benefit corporations” or “Certified B Corporations.”

Benefit corporations

Benefit corporation status is provided by the Secretary of State in the jurisdiction where an entity is organized. Qualifying companies have the green light (no pun intended!) under state law to balance environmental and social concerns when making what otherwise would be purely financial decisions. They can choose to favor local vendors and suppliers, even if more costly, to support their local communities. A wide range of industries can apply for this status, and it should not be confused with a non-profit entity. (The benefit corporation does not abandon its goal to create wealth for shareholders; it merely adds some other often nameless beneficiaries to those it strives to support.) The status does not provide a unique tax treatment (and in some cases can be conferred upon LLCs or proprietorships), but instead provides legal protection to its executives and board members. It also provides different accountability standards and more transparency than most entities. Benefit corporation status is relatively young. Maryland was the first state to pass benefit corporation legislation, and it is now authorized by 30 U.S. states, including each New England state except Maine.

B Corporation certification

Separate from the benefit corporation status, but very much related in mission, is “B Corporation certification.” This status is a private certification that has nothing to do with legal status, and is not provided by state authorities (although a company seeking this certification would want the legal protection of being an actual benefit corporation). Instead, it is a highly-sought after designation provided by a worldwide non-profit organization known as B Lab. A company must meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability to achieve this recognition.

Companies and employees who hold the social and environmental values of benefit corporations and B-Corporations want to work with companies that share similar values, and their status alone can generate increased business from other like-minded entities and customers. Also, reports from Harvard Business Review and Hewitt Associates indicate that such entities are well-positioned to attract talent, especially that of millennials, who tend to highly regard these and similar efforts.

If becoming a Certified B Corporation is of interest, the B Lab website outlines the numerous other benefits along with the process of becoming certified. The website has a free, confidential, “B Impact Assessment” which takes about an hour to complete. To pursue legal status as a benefit corporation, begin by visiting the website of the Secretary of State of the state in which your company is (or will be) organized.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.