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To “B” or not to “B”: B-Corporations do well by doing good

By IncNow | Published April 12, 2016

public benefit corpDo you want to make money while promoting clean and green practices? Are you promoting employment of disadvantaged people? A Public Benefit Corporation (“PBC”) in Delaware, which some refer to as a B-corporation, is a new type of corporate structure that is a for-profit business that has a stated “public interest” purpose set out in its certificate of incorporation to allow for a purpose beyond maximizing profit for stockholders. A Public Benefit Corporation can be thought of as a standard corporation whose directors “must” use at least some corporate resources to promote its stated public benefit, or risk lawsuits from its own stockholders. This is to be distinguished from a non-profit corporation, which does not have stockholders and which must use all of its profits to forward a specific public purpose.

In a traditional general corporation, the duty of the directors is to maximize profits and value for the stockholders. This dates back to a case of Dodge v. Ford, when the Dodge brothers, investors in Ford Motor Company at the time, sued Henry Ford and won because the Dodge brothers were stockholders and Henry Ford decided to reinvest profits and retain cash instead of giving dividends to the investors. Later, the Dodge brothers started their own car manufacturing company. Although there was reason to believe a traditional general corporation could provide a public benefit by amending its purpose in its Certificate of Incorporation, the Public Benefit Corporation was a way to make that alternate social enterprise purpose mandatory, rather than permissive.

To incorporate a Public Benefit Corporation in Delaware, the Certificate of Incorporation must declare that it is a Public Benefit Corporation and provide a specific public benefit, which is reviewed and approved by the Delaware Secretary of State prior to accepting its Certificate of Incorporation for filing. Its directors must report to its stockholders every other year its activities in furtherance of the stated public purpose. No outsiders other than its stockholders may enforce this public benefit. Additionally, there is no Delaware public reporting of this public benefit. Some other states have more strict rules on Public Benefit Corporations.

Additionally, should you want your Public Benefit Corporation to carry a “B-corp” seal, a private non-profit called B Lab can be paid $500 to $50,000 per year (depending on annual revenues) provided its multi-part test and application are approved. It should come as no surprise that one of the biggest advocates promoting Public Benefit Corporation statutes nationwide is B Lab. The B Lab seal is not a legal requirement any more than BBB Membership is. It is, however, a third party that can give the public confidence that you are in fact doing good deeds.

The question is “How is a B-corp taxed?” A common misconception is that a Public Benefit Corporation is afforded certain tax benefits, much like a nonprofit (non-stock) corporation with 501(c)(3) status. However, a Public Benefit Corporation does not have a separate federal tax designation, and like a general Delaware corporation, a Public Benefit Corporation is taxed as a C-corp by default. Incorporating as a Public Benefit Corporation only affects corporate duties and corporate purpose, not federal or state tax status. Public Benefit Corporations may also make the S-corporation tax election.

Incorporating as a Public Benefit Corporation can benefit a business in other ways. Amending your Certificate of Incorporation to designate it as a Public Benefit Corporation may attract customers who wish to support businesses with a shared public interest of theirs. A Public Benefit Corporation may also be more attractive to investors who wish to invest in businesses for that same reason. However, money is not free—investors will surely expect a solid proven business model and revenues before investing.

Do not expect to find tax benefits to being a Public Benefit Corporation, even if you are B Lab Certified. There is no such thing as an IRS classification for a B-corp or a special tax return. “B” does not refer to a subchapter of the Internal Revenue Code, in the way “S” or “C” do.

Doing good is its own reward and can help you align with your customers and promote your brand. Companies like Kickstarter and Patagonia are B Lab Certified and they and their customers enjoy supporting the greater good as they define it.

Of the more than 200 Public Benefit Corporations incorporated in Delaware since the law was enacted a few years ago, Agents and Corporations, Inc. (IncNow) has formed a dozen or so.
This trend may be off to a slow start, but it should be considered for your existing corporation or any corporation you are thinking of starting.

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When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go