In recent years, as the terms “B Corp” and “benefit corporation” have been used more frequently, they have also mistakenly been used interchangeably. The confusion is in many ways understandable as B Corp and benefit corporation sound similar, help similar types of mission-motivated ventures, and are largely associated with same nonprofit organization, B Lab, which developed the B Corp certification and helped in drafting the benefit corporation model legislation. Nonetheless, these are two distinct concepts with important differences.
Here we will explore what it means to be a “B,” highlighting some of key differences between the B Corp certification and benefit corporation legal structure.
Type of entity
Any type of for-profit structure, including a sole proprietorship, partnership or corporation, can apply to B Lab to be a Certified B Corporation (also referred to as a “B Corp” or “Certified B Corp”). To apply, the company must complete the B Impact Assessment Survey, which measures social and environmental impact, and score at least 80/200 points. The applicant will also be required to sign a Term Sheet and Declaration of Independence. Additionally, if the applicant is a corporation or limited liability company, it may also need to amend its governing documents to include the B Corp Legal Framework so that the company considers the impact of its decisions not only on shareholders but also its employees, customers, suppliers, community, and the environment. Certification is for a two-year term and subject to an annual certification fee ranging from $500 – $25,000 annually (based on the Certified B Corp’s annual sales). Because the B Corp certification is a license, a company can easily terminate the license without necessarily making other corporate changes.
Unlike the certification, a benefit corporation is a legal form of entity and specific type of corporation that can only be incorporated in one of the seven states that have enacted legislation authorizing the creation of a Benefit Corporation entity. It is a unique legal entity in that every benefit corporation is required by law to have a general public benefit purpose (i.e., “a material positive impact on society and the environment taken as a whole, as measured by a third-party standard, from [its] business and operations”). It may also have an optional special public benefit purpose such as preserving the environment. Additionally, a change to or from a benefit corporation is a corporate entity change requiring shareholder approval. Thus, the benefit corporation is itself a for-profit structure that could actually apply for B Corp certification.
Modified Fiduciary Duties
Corporate board members generally have a fiduciary duty to the corporation and its shareholders. Some states also have constituency statutes that permit a board to consider constituency groups as defined in the statute such as employees and the community at large in certain situations.
The B Corp certification attempts to modify fiduciary duties by requiring a company’s governing documents to state that its governing body members must consider multiple stakeholders, and not just shareholders (or other owners). However, this requirement may not always work well with existing corporate law frameworks that are highly protective of shareholders, particularly with respect to major corporate changes (e.g., mergers, sale of company).
The benefit corporation model legislation on the other hand creates a new legal framework. It explicitly requires (and thereby permits) directors to consider shareholders, employees, customers, community and society, the local and global environment, short and long terms interests of the benefit corporation, and the ability to accomplish general and any specific public benefit. In addition to traditional areas of liability, a director or officer may also be held liable for failing to pursue the general or specific public purpose in a benefit enforcement proceeding, a cause of action unique to the benefit corporation (with the exception of Maryland's benefit corporation legislation). Importantly, this expansion of liability does not also expand the classes of individuals to whom fiduciary duties are owed; no person who is a beneficiary of the general or any specific public benefit of the corporation would have standing to sue the directors or officers solely by virtue of such position. A benefit enforcement proceeding is instead a mechanism for traditional parties to hold directors and officers accountable with respect to the general and/or specific public purposes of the benefit corporation.
There is no specific public reporting requirement attached to licensing the B Corp certification. However, B Lab does make publicly available on its website a B Impact Report which displays the B Impact Assessment results of a given Certified B Corp in areas such as accountability, employees, consumers, environment, and community.
The benefit corporation model legislation heightens reporting requirements as compared with other for-profit structures by requiring a benefit corporation to prepare a special annual report called a benefit report. The annual benefit report includes information such as narratives describing how it pursued its general public benefit, any circumstances that hindered the creation of a general or any specific public benefit, and an assessment of its social and environmental performance using a third-party standard. The benefit corporation must make the benefit report publicly available on its website, if any, or otherwise provide a copy without charge to anyone who requests a copy.
Third-Party Standard and Audit
There is only one standard and one certifying body with respect to becoming a Certified B Corp: every applicant for B Corp certification is measured against the same third-party standard issued by B Lab called the B Impact Assessment and B Lab is the only certifying body of the B Corp certification. Additionally, as a condition of certification, a Certified B Corp must agree to subject itself to an audit by B Lab if randomly selected. The B Impact Assessment survey is updated every two years and B Lab randomly audits 20% of all B Corps over the two-year certification period, meaning a Certified B Corp has a one in five chance of being audited.
The benefit corporation model legislation on the other hand does not mandate a specific third-party standard that a benefit corporation must use in preparing its benefit report. It instead provides criteria for selecting an acceptable third-party standard such as selecting a standard developed by a person independent of the benefit corporation and that makes publicly available certain information about the standard. While a benefit corporation must select a third-party standard, it does not have to be assessed by a third-party, meaning that the benefit corporation can assess itself so long as it is using the selected third-party standard. Some critics have noted this allows at least the appearance of the fox guarding the hen house and the lack of third-party assessor may do little to solve the current greenwashing problem. Others have also wondered which third-party standard will bring the most legitimacy and accountability because the legislation does not require a specific standard universal to all benefit corporations. Currently, B Lab is the most well known third-party standard that could satisfy the benefit corporation legislative requirements. It has yet to be seen which third-party standards will be widely used and whether the role of the third-party will evolve beyond generating third-party standards into areas such as audits even if not required by law for added transparency and good faith.
B Corp certification has received some of its greatest attention in the last two years despite being available since 2007 and has grown into a community of over 517 Certified B Corps in the country, spanning 60 industries, such as Seventh Generation, Good Capital, and our very own NEO Law Group. While many of these B Corps have become leaders in their industries in their pursuit of social and environmental values, only recently have they been pushed to evaluate how they stack up against new hybrid legal models.
The benefit corporation is similarly a new conversation with the legal structure first appearing in 2010 when Maryland became the first state to enact benefit corporation legislation. However big players such as Patagonia, which became the first benefit corporation in California, are keeping the momentum alive and potentially paving the way for other benefit corporations.
Only time and experience will determine whether the B Corp certification or benefit corporation legal structure will bring the full range of advantages and value advocated by "B" proponents to social entrepreneurs, consumers, and others. For now, understanding what it means to be a “B” and the distinction between a B Corp and benefit corporation is a necessary and much needed first step in this ongoing assessment.
More information on the B Corp certification is made available by B Lab at bcorporation.net and in the B Corporation 2012 Annual Report.
More information on the benefit corporation is made available by B Lab at benefitcorp.net and in the Benefit Corporation White Paper, "The Need and Rationale for the Benefit Corporation: Why it is the legal form that best addresses the needs of social entrepreneurs, investors, and, ultimately, the public."
The "Benefit Corporations: State Statute Comparison Chart" by Professor J. Haskell Murray is available here.
A law review article summarizing the benefit corporation, "Benefit Corporations—A Sustainable Form of Organization?" by Professor Dana Brakman Reiser is available here.