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Doing Well by Doing Good: Why Startups May Want to Consider B Corp Status

October 20, 2015
Startup Blog Post

Socially and/or environmentally minded startup entrepreneurs should take a second look at B corporations. Informally, many companies seek to bring good to the community in which they do business and operate in a socially and environmentally conscious manner. Regardless, these entities are still formed to make a profit, and such corporations do not fit the mold of a traditional nonprofit. In the past, these companies were left with no option but to incorporate or organize as a for-profit corporation or limited liability company. Now, though, many states have started offering community, socially, and environmentally minded entrepreneurs another avenue for forming a legal entity through which to do business for profit. This new option is called the “public benefit corporation” or “B Corp.”

What is a B Corporation?

Fiduciary standards generally require company directors to act in the best interests of shareholders and to maximize profits. Companies helmed by entrepreneurs with broader missions might act in conflict with these traditional fiduciary standards. States with public benefit corporation legislation have recognized this problem. By offering entrepreneurs the ability to incorporate as a B Corp, these states provide companies with the freedom to make a profit while simultaneously pursuing artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological interests - even if such pursuits might cost the company more in the short-term. Most U.S. states except AL, AK, KS, MI, MT, NC, and OK have enacted B Corp. legislation, constituency statutes, or other enabling laws.

One state in which many starts-ups choose to incorporate - Delaware - has enacted B Corp legislation. Per Delaware’s legislation, public benefit corporations are subject to a few different requirements than standard for-profit corporations. Delaware B Corps are required to act in a manner that balances stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit. Indeed, directors are specifically required to consider the public benefit when exercising authority. In addition, the Delaware certificate of incorporation must identify that it is intended to be a public benefit corporation and the specific public benefits that are to be furthered by the entity’s conduct. Further disclosure, notification, and other requirements also apply.

What is a Certified B Corporation?

The term “B Corp” may also be used to refer to entities that have received independent, third-party certification as meeting certain standards of environmental and social consciousness. Hence, a B Corp may be an entity incorporated under state law as a public benefit corporation, and/or a corporation that is a “Certified B Corporation” by B-Lab, an independent certification body.

First, some states, including Delaware, specifically contemplate third-party certification for entities legally organized as B Corps. Their legislation may even provide that third party certification can be required via the certificate of incorporation or bylaws. Second, third party certification is particularly helpful in those states that do not currently offer entrepreneurs the option of incorporating a public benefit corporation. B Corp certification proclaims to the public the company’s goals in a way that might otherwise be hard to accomplish, and connects the company with entities that are similarly minded. In short, third party B Corp certification involves a rigorous assessment of the company’s social and environmental impact. For startups (ie: companies operating for 12 months or less), B-Lab offers special “Certification Pending” designation if the startup is on the path to becoming a Certified B Corporation.

Overall, there are options out there for entrepreneurs who are socially conscious, but whose desires extend beyond that of the traditional nonprofit. Of course, there are a myriad of other factors that need to be considered before deciding to incorporate or organize as one type legal entity versus another. However, entrepreneurs interested in using their business as a force for the public good may want to consider whether incorporating as a public benefit corporation is right for them. 

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