As an entrepreneur about to launch a new venture, you will often hear mentors and advisors comment on the importance of choosing the right type of business entity. From limited liability companies, to C-Corps an entrepreneur can be faced with many choices. Add a social agenda and things can get tricky. Traditionally, entrepreneurs that had socially driven mindsets were often given two choices: head up or start a not-for-profit. The good news is that this is no longer the case. Today, the socially driven entrepreneur has the option of starting a Benefit Corporation (B-Corp for short). Benefit corporations are essentially businesses with social causes built into their for-profit business models. In other words entrepreneurs can commit their ventures to addressing specific public/social causes. B-Corp legislation has already been passed in a number of states including California, New York, New Jersey, Maryland, Virginia, and several others. For a quick guide to becoming a B-Corp in your state of choice check out the Legal Roadmap provided by the non-profit behind the B-Corp movement B Lab. If you’re still not sure whether a B-Corp is right for you, then consider the following reasons for using this new type of business entity:
Scale: Because benefit corporations have a for-profit business model they are much more capable of scaling up. Scaling up of a business is of huge importance not only to investors but to a venture looking to achieve sustainable growth.
Capital: Again the added perk of having a for-profit business model allows this type of business entity to easily attract investment capital from a wide range of sources including the new impact investing. Impact Investing according to this US News article refers to investments that fall in the middle of Philanthropy and Socially Responsible Investing. The for-profit model seemingly acts as a magnet for investors who are worried about their returns. Another added benefit is that in some cases the B-Corp can even raise money through donations – the only restriction being that the grantees must be 501c3 non-profits. Start-up ventures operating within capital intensive industries and featuring socially driven business models will feel right at home with this type of corporation.
A Network of Perks: We use the phrase a network of perks because members of the B-Corp network are good to each other – offering discounted products and services to other companies in their network. According to an Inc.com article mainstream companies are beginning to take notice. For instance, Intuit offers QuickBooks for free to B-Corps, and Salesforce.com offers them a non-profit discount. Do not expect major tax incentives, however, as most B-Corps pay the standard corporate income tax.
It has been found that this model works best when the business has more than one social impact. Also, pursuing a B-Corp status helps to quantify your social impact – something which is vital to obtaining impact investor support. However, despite the benefits offered by this type of entity, there are some concerns. Before jumping aboard the B-Corp bandwagon aspiring entrepreneurs should be sure to consider the following:
Answering the Tough Questions: In addition to the legal requirements there are over 220 questions that must be answered before a company can achieve a certified B-Corp status. Since 2007, over 900 companies have failed to make the cut. Those that do make it must also amend their company bylaws and pay annual fees ranging from $500 to $25,000 depending on the size of the business. For more info on this performance assessment and achieving certified B-Corp status check out B Labs’ ‘How to Become a B?’ found here.
Random Checkups and Re-Certification: With B-Corps being held to higher standards of purpose, accountability, and transparency it is expected that constant verification of those standards would be necessary. As such certified B-Corps are subjected to random third-party checks to verify performance results. Another cause for concern with B-Corp certification is that companies are only certified for two years and must constantly recertify themselves as standards evolve for this new type of entity.
Market Scrutiny: Undertaking a social agenda is no easy task and the increasing number of green and socially-conscious customers and competitors only makes things worse. As the market becomes flooded with new ventures promoting various social and environmental causes, consumers and stakeholders are becoming very good at identifying and punishing those firms that are not true to their word and cause.
Even with the support of a for-profit business model entrepreneurs must be ready to face difficult challenges and make difficult decisions when operating this new type of business entity. Like its big brother the S-Corp, legislation surrounding the operation of this type of entity is still evolving. The good thing is that the relatively new nature of B-Corps means that the new businesses undertaking this model can play a huge role in establishing best practices for others to follow in the future.
For additional B-Corp tips be sure to check out this article, and for examples of certified B Corporations check out the Inc. 5000 list found here. Also feel free to sound off below on whether or not you think a B-Corp is right for you.