February 4, 2016 in Commentary

INSIGHT: Clarifying Benefit Corporations and B-Corps for the Social Enterprise

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Although they are too often used interchangeably when discussing social enterprises, Benefit Corporations and B-Corps are not the same animal. Benefit Corporations have been in the news for severals years – from 2012, when the much-praised Greyston Bakery became the first NY Benefit Corporation, to numerous headlines announcing Kickstarter’s switch to the Benefit Corporation structure. It’s important for responsible social entrepreneurs – and those who support them – to understand the difference. Briefly, a benefit corporation is a newer state-defined business structure (alongside the more familiar corporation or LLC) that comes with statutory requirements at formation and ongoing accountability requirements. B-Corp, on the other hand, is an optional certification, independent of a business’s legal structure or requirements.

First, what’s a Social Enterprise?

Some background to set the stage. “Social Enterprise” is the broad term used for any for-profit business that is, at least in part, motivated by doing some good in the world. The claimed positive impact can take many forms – from donating a percentage of profits to charities to focusing their business on addressing a social issue like occupational training, therapeutic services, or educational enrichment. Until recently, there was effectively no governmental connection to these intentions. State oversight of traditional non-profit entities was relatively well-developed but there was no similar oversight to hold a social enterprise accountable.

With the rise of social enterprises as an familiar and accepted concept, many states passed legislation creating hybrid business structures to accommodate them. These new entities are still for-profit ventures. However, beyond generating profit, they are required to pursue some generally or specifically defined public benefit. And, unlike self-proclaimed social enterprises, these new business entities are held accountable annually – to their shareholders, to the public and to the state.

By far the fast growing and most readily available of these new options is the Benefit Corporation, sometimes called a Public Benefit Corporation. Now used in 30 states, the Benefit Corporation became available in New York in 2012.

Okay, so what’s a B-Corp if not an abbreviation of Benefit Corporation?

A B-Corp, or Certified B Corporation, is a certification that a company pays for (costing from $100s to to tens of thousands of dollars). It’s administered by an organization called B-Lab. Businesses use this as one way to show the world that they’re good actors trying to address some social or environmental issue. It’s important to keep in mind that B-Corp certification is not a legal requirement, and is not based or affiliated with any legal standard. If fact, any business structure – corporation, LLC, partnership, even a sole proprietor – can apply for B-Corp certification.

Is there any connection between Benefit Corporations and B-Corp certification?

In reality, there is no direct association between the two. In NY, benefits corporations are required to undergo annual assessments of their public benefit performance. This assessment must be conducted by an independent party using transparent standards, and the result of the assessment must be made publicly available. The B-Corp certification is just one of the assessment options out there. Although it’s one of the better known certifications, you shouldn’t assume it’s the best one out there, the best one of your business, or infallible. More than one business has had its public benefit efforts or motives questioned despite having a B-Corp certification.

What’s the point?

It’s important for social entrepreneurs, and the general public, to understand the difference between the specific legal requirements and accountability associated with a Benefit Corporation (the legal business structure) and B-Corps as a paid certification apart from any enforceable legal obligations.

For many companies, the commitment to social responsibility, like environmental ‘greenwashing’, goes no deeper than superficial marketing campaign aimed at promoting positive public perception while putting little effort into producing any actual societal benefit. If a traditional business has its social cause claims disproved, the effective ramifications are limited to PR. A true Benefit Corporation has a legally enforceable obligation. If it fails to act for the ‘public benefit’, it can be legally challenged by it’s directors or shareholders in ways unavailable in a traditional business.

As suggested above, existing companies can make the switch to Benefit Corporation. To discuss these opportunities, feel free to contact Zak Shusterman directly.