B Corps is Not a New Legal Form by Keren G. Raz

B Corps, formally known as a Certified B Corporation, is not a new legal form. The benefit corporation is. It can get confusing, I know. I’ve encountered a lot of questions about it when giving presentations about emerging legal forms for social enterprises. In this post, I want to emphasize the difference.

Critically, a Certified B Corporation (hereinafter referred to as B Corps or a B Corporation) is a label given by B Lab to businesses that pass a socially responsible certification process. B Corps is not a legal form and has no legal significance. A benefit corporation, on the other hand, is a new legal form, that became law in Maryland on October 10, 2010. Legislation similar to that in Maryland will become law in Vermont in July and was recently passed by the New Jersey legislature.

Why the difference is significant:

• One can be a B Corps and yet be incorporated legally as a C corporation, an LLC, even a sole proprietorship. In other words, a company can be certified as a B Corps without ever incorporating as a benefit corporation

• One can be a benefit corporation under Maryland law without being a B Corps. The Maryland law does not require that benefit corporations be certified as B Corps. Rather, it requires that benefit corporations’ social and environmental performance be assessed by an independent third party that makes publicly available or accessible the following information:

1. The factors considered when measuring the performance of a business;
2. The relative weightings of those factors; and
3. The identity of the persons who developed and control changes to the standard and the process by which those changes were made.

The key difference is that the law requires a third party assessment, whereas B Corps is a certification. I do however wonder if benefit corporations that are not certified in the future will have to address potential shareholder lawsuits and what impact that will have on the implementation of the law. If a certification becomes an unstated requirement, then only B Lab, the creators of the B Corps certification, to this author’s knowledge, provide an assessment that meets the law’s requirements.

• Beginning on October 1, 2010, about 11 companies registered as benefit corporations. In comparison, there are 369 B Corporations.

B Corps and the Benefit Corporation are easily confused because they are similar in name and purpose. Also, the creators of the B Corporation certification, along with an attorney from the firm Drinker Biddle, drafted the legislation that created the benefit corporation – the new legal form. B Lab’s certification and the new legal form may have been created for the same purpose – to facilitate the growth of socially responsible businesses – but in the eyes of the law, they are two very different things. Thus, praise or criticism directed at the law may not necessarily be applicable to B Corps, and vice versa.

Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.

2 Responses to B Corps is Not a New Legal Form by Keren G. Raz

  1. I am an owner of one of Maryland’s first corporations to file to become a Benefit Corporation under Maryland’s new law, Emory Knoll Farms, Inc.

    I’d like to clarify several key points in the useful article above.

    First, as the author mentions, “One can be a B Corps and yet be incorporated legally as a C corporation, an LLC, even a sole proprietorship.” We should also mention that by comparison, the Maryland Benefit Corporation Law applies only to firms that are S-Corp’s or C-Corp’s. It doesn’t apply to sole proprietorships, LLCs, or the like. This was largely an oversight by the drafters of the bill, and hopefully will change in subsequent legislation.

    Also, while (as stated above) the Maryland Benefit Corporation law requires an annual assessment relative to an independent, third party instrument; there is no requirement on the assessment instrument itself. The instrument may be the B-Labs assessment or any other instrument administered by an independent organization.

    Neither does the law require any actual levels of public benefit. A Maryland benefit corporation may report no public benefit whatsoever, and also may show no increase of public benefit from year to year. That company will meet the requirements of the law in this regard so long as they file an annual report which reflects their actual level of benefit. By comparison, a certified B-Corp must meet minimum requirements set by B-Labs and also may be subject to an audit process to maintain their certification.

    Additionally, the B-Corp certification does not require any public disclosure or reporting of the results of the assessment, as the Maryland Benefit Corporation Law does.

    Finally, the author mentions: “I do however wonder if benefit corporations that are not certified in the future will have to address potential shareholder lawsuits and what impact that will have on the implementation of the law.” The Maryland law is intended to specifically protect directors from lawsuits by shareholders. But the intention is not to ensure that a particular level of public benefit is maintained, but rather to reconcile the potential conflicts between the responsibilities of the directors to preserve & increase shareholder value and the very real possibility that corporate investments in ‘public benefit’ may not contribute to the shareholder value. In fact the law encourages directors to consider public benefit in decisions.

    In the words of MD Senator Jamie Raskin, the bill’s sponsor: “Benefit corporations cannot be sued for failing to place profit over every other value. Under this model, members of the corporate boards of directors in these businesses will be vigilantly watching out for the company’s social “benefit” as well as its profit. “

  2. I would like to comment on something Mr. Shepley, (whom I have personally met and admire very much) said in his comment with respect to liability. He is right to say that the new law is intended to protect directors from liability. However, that is not to say that it does not open them up to different liabilities.

    I absolutely think that the benefit corp law could open up a director to a derivative suit from a shareholder who does not feel that the corporation is doing enough to fulfill its social responsibilities. Indeed, the benefit corp legislation passed in other states (again drafted by B Lab and their counsel) all specifically allow for “benefit actions” against the directors or officer for just such a thing. It is true that MD’s law does not contain this specific language, but MD is also one of the few states that does not have a specific statute for ANY type of derivative suit for corporations. However, that right does exist in MD’s common law, and I think there is a good chance that would extend to a “benefit action” type suit as well. In other words, the lack of specific statutory authority is probably more a reflection of Maryland’s general way of handling such claims rather than meant to be interpreted as an exclusion to such altogether.

    Senator Raskin, whom John mentioned, seems to agree with this as well. (you can find a link to his comment on my blog post on just this subject here: http://www.ascensuslaw.com/1/archives/03-2011/1.html)

    Ultimately, this will have to be worked out through the courts. But this is one of the issues I have had with the benefit corp legislation from the beginning. It is being promoted as closing the door to one type of liability, while (for the most part) ignoring the possibility (I would say probability) that it is opening another. I support the benefit corporation legislation but want people to be fully informed of its consequences.

    Also, MD’s legislature recently passed a benefit LLC law. It is waiting on the governor’s signature and will take effect as early as June 1 if signed into law. Which is great. LLCs can face “member derivative suits” just like a corporation and is now the favored entity choice for new businesses. It was an odd oversight not to include them in the first place. Hopefully other benefit states will follow suit.

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