To B-Corp or Not to B-Corp?

September 26, 2012

What if a goal of your business is making the world a better place, not just making a living? What if you want to engage your community for the common good, while still building equity in your business venture? Would that change your choice of business structure?

Traditionally, organizations have generally been grouped into two categories: for-profit and non-profit. Of course, we know that being a “for-profit” company is no guarantee of profitability, and some “non-profits” are quite powerful financially. The differences between the two really boil down to a choice between competing missions for the Company: Does it exist to “do good” or does it exist to “do well”?

Two new options have been recently approved by the California Legislature which allow entrepreneurs to find a balance between profitability and social impact, not simply choose between them. The first is called a Benefit Corporation. A “B-Corp” (Corporations Code Sections 14600-14631) can describe its mission and purpose more broadly than a traditional corporation which has an obligation to its shareholders to focus on profitability. A Benefit Corporation can designate goals and objectives beyond profitability that it will pursue in the interest of both shareholders and the larger community. While many companies boast of their contributions to their community, a Benefit Corporation is obligated to go a step further. Every fiscal year it must prepare an annual report that measures and reports progress on both financial and “beneficial” goals. These results must be subject to an independent third-party assessment. Earlier this year, Ventura- based Patagonia became the first registered California “B-Corp”.

A Flexible Purpose Corporation (Corporations Code Sections 2500-3503) is similar to a Benefit Corporation, but is not subject to the requirement for a third party assessment and can define its special purpose very narrowly. Being less restrictive, a “FlexC” may be better suited for smaller or younger companies than the B-Corp. It does however, still have to report and track its progress towards its goals and make that information available to the public.

These companies are treated like a for-profit entity for tax purposes, without the tax-free status of a charity. Since there are no direct tax advantages, why would a company make the change? For many companies considering the move, becoming a B-Corp or FlexC is a way to formalize their social commitments to employees, investors, vendors and customers. It remains to be seen how many companies will adopt these new structures, but for a certain few, they may be just the right tool for the job.

This article was published in the Ventura County Economic Development Association News, September 2012