Pursuing a social mission has become increasingly commonplace for today’s businesses. Once the exclusive domain of non-profit organizations, socially-focused, for-profit companies are flourishing, in large part due to the support of consumers, shareholders, and even venture capital firms, many of which have fund portfolios earmarked for such projects. If you are contemplating a socially-driven business model, there are two distinctive paths to consider: (1) organizing as a public benefit corporation (PBC), or (2) becoming certified as a B corp. Understanding the specific advantages of each one will help you choose the structure best suited for your business.
Public Benefit Corporation
PBCs have been gaining in popularity as barriers to formation are being eliminated. To start, a PBC is a type of C corporation that is available in several states, including California and Delaware (where many companies are incorporated). PBCs require an equal balancing of interests among shareholders, stakeholders (those who are involved and affected by the corporation, such as employees and customers), and the PBC’s social mission. This “tri-partite” balancing is the core difference between PBCs and traditional C Corps, which are focused solely on maximizing shareholder value. Some well-known PBC’s include Patagonia, Ben & Jerry’s, Eileen Fisher, and Kickstarter, as well as such publicly traded entities as Lemonade, Inc. (financial services), Zymergen, Inc. and GreenLight Biosciences (both biotechs), and Coursera (education).
While formation requirements may differ in each state in which PBCs are offered, the decision of whether to form a company as a PBC is typically made at the point of incorporation. In other words, a new business should consider the pros and cons of a PBC just as it would any other legal structure (LLC, partnership, C corp. or S corp.) before taking steps to form a legal entity. That said, in recent years, it has also become easier for an existing company to convert to a public benefit corporation structure.
Here are a few pros and cons of the PBC model:
|Founder’s vision/values are ingrained in the business model, which means there will be less risk of shareholder pushback.||As a relatively new business model (7 years in CA and less in DE), not much Delaware case law exists to inform corporate behavior or governance.|
|PBC regulations specifically allow companies to be measured using non-monetary, social benefit KPIs.||VC funding will require investors to understand/support the company’s non-monetary goals and mission.|
|Protects the founder’s mission through capital raises and leadership changes.||Some public benefit corporations may not be considered attractive targets for acquisitions; the impact of long-term investing in PBCs is still being determined.|
|Creates flexibility when evaluating potential sale and liquidity options.||If the taxation structure of a C corporation is not to your advantage, a benefit corporation should not be considered.|
Supports mission-driven activities post-IPO.
As with any corporate formation, it will be important to review the financial/tax implications of each type of legal entity with an accountant or financial advisor before choosing the right one for your business.
A second option is obtaining B Corp. certification through a third-party organization, B Lab, which acts as a certifying agency for companies seeking public recognition for having met a high level of social benefit criteria. Any kind of business (law firms, partnerships, LLCs, and private and public corporations) can be considered for B corp. certification, much in the way ISO or BBB certifications work. The company does not need to be structured as a PBC in order to qualify. Well-known B corp. certified companies include The Body Shop, Bombas, Athleta and Danone S.A., which has obtained B Corp certifications for some of its subsidiaries. Some PBC’s also choose to obtain B Corp certification.
To become B corp. certified, a company must meet B Lab’s required criteria, a decision made by B Lab following a very thorough examination of a large number of factors intended to verify "social and environmental performance, public transparency, and legal accountability to balance profit and purpose.” The process is quite rigorous and requires constant compliance and recertification (every 2 years).
|Any legal entity can consider becoming B corp. certified.||Certification process is rigorous and requires recertification every 2 years.|
|B corp. certification is an effective way to communicate a company’s core values and its commitment to operating in accordance with them.||Requires strong processes, policies and procedures, as well as a vigilant compliance obligation.|
Given the rigor of this process, companies that are mature enough to have strong processes and policies in place regarding people, sustainability, social benefit, financial, transparency, etc. are best prepared for B corp. certification.
Mission-driven companies are stewards of change, leading by example through their commitment and transparency, and aligning their operations around social good. If you are interested in validating and publicly certifying the social good being done by your company, learning more about public benefit corporations and/or B corp. certification may be the right next step. For more information, please contact Chandana Rao at email@example.com or 929-356-5940.
Chandana Rao is a member of our New York-based team with nearly 20 years of legal and business experience. She regularly advises her clients on corporate, IP, and commercial matters, including influencer agreements, brand collaborations, MarTech agreements and social media collaborations. Chandana can be reached at firstname.lastname@example.org or 929-356-5940.