By Jennifer Friedman
There’s a new wave of entrepreneurs who want to make a positive impact on the world. These people, however, don’t necessarily want to operate their companies as traditional nonprofit organizations. The challenge for these socially minded business owners is executing philanthropic programs and efforts while also trying to earn profits for shareholders, raise capital, and grow their companies.
Many of these entrepreneurs are now organizing their businesses as benefit corporations or B-corps. Unlike traditional corporations which are operated solely to profit shareholders, benefit corporations balance shareholders’ interests with the B-corp’s corporate mission of making a tangible, positive impact on the community and environment.
Currently, 28 states offer the benefit corporation as an entity choice: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, Virginia, Washington, Washington, D.C., and West Virginia. It’s important to note that the requirements for operating as a benefit corporation varies from state to state.
Some of today’s most recognizable brands, including Etsy and Patagonia, are organized as benefit corporations. For entrepreneurs interested in forming a benefit corporation, here are three things to know:
1. You will safeguard your business’s social mission — Entrepreneurs that start businesses with a specific social mission should strongly consider incorporating as a B-corp. This legal act will ensure the corporate mission is preserved even after the entrepreneur retires — or in the event that the company takes on new investors or if the company is put up for sale. Structuring a business as a benefit corporation prevents a new CEO, investors, or owners from abandoning the declared social responsibility or corporate mission in favor of short-term profits.
2. You must be accountable — To ensure accountability as a benefit corporation, companies are required to make an annual benefit report publicly available. The report measures a company’s overall social and environmental performance against a third-party standard. In addition, the report is a way to showcase the positive effects of benefit corporations.
3. You can maintain tax status flexibility — Forming a benefit corporation will not affect a company’s tax status as business owners can still choose to be taxed as an S-corp or C-corp. Benefit corporation status only impacts corporate purpose, accountability, and transparency as it relates to social responsibility.
In addition, a benefit corporation stands as a hybrid entity, structured as a combination of a for-profit and nonprofit venture. On one hand, nonprofits can lose their tax-exempt status if they utilize contributions and other income for personal gain. In contrast, benefit corporations are run like normal businesses, but do not receive scrutiny for investing in philanthropic efforts
With an increasing number of business owners embracing the benefit corporation, companies can promote social good, while still being profitable entities. If structuring your company as a B-corp sounds like a good fit for your organization, whether you’re incorporating for the first time or would like to change your company’s current corporate status, the next steps would be to determine the specific requirements of your state(s) of operation, consult with your legal representative(s), and consult with other small business experts.
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