Chapter 7: B Corporation Fundamentals

The B corporation–or “benefit corporation”–is the newest entity form that has come onto the scene. It expressly allows owners of a company to establish a social or environmental purpose in addition to making profits. This is also known as the triple bottom line: people, planet, profits. The B corporation is not a nonprofit corporation or even a hybrid for-profit/nonprofit; it is a for-profit business entity that has a fundamental social or environmental purpose. The B corporation is now officially recognized by 32 states and the District of Columbia. This chapter will provide a brief overview of the B corporation. It also points to some resources to help you explore the B corporation option further if your farm operation shares the triple bottom line as a goal.

	General Concept	Terminology
B Corporation (If recognized by your state)	Name	Depends on state statute. In most states it is “Farm Name, Inc.,” but in the state of Washington it has to be “Farm Name, SBC”– “SBC” stands for Social Benefit Corporation
	Owners/investors are called	"Shareholders"
	Persons wo make management decisions are called	The “Board of Directors” is responsible for making key decisions; the “Officers” are responsible for the day-to-day management
	Creation document is called	"Articles of Incorporation"
	Organizing document is called	"Bylaws"
	An owner's investment in the company is called	"Equity Investment"
	An ownership share is called	"Shareholder Equity," or "Shares"
	A paymeny of the company's rpofits to the woners is called	"Dividend"
	Is there personal liability?	Limited to a shareholder's investment if corporate formalities are maintained
	How many participants can you have?	One or more people–can be other business entities or trusts, unless elect S corporation tax status
	Are different shareholder classes allowed?	Allowed, unless elect S corporation tax status
	Is an EIN necessary?	Required
	Who files the tax return?	Entity files an income tax return and pays corporate taxes; individuals also pay taxes on any dividends they receive from the corporation. Option to elect S corporation federal tax status
	Are there other key filings?	Most states require you to file an Annual Benefit Report
B Corporation with S Corporation Federal Tax Status	How many participants can you have?	Maximum 100 people; all must be U.S. citizens and none can be another business entity or trust
	Are different shareholder classes allowed?	Not allowed
	Who files the tax return?	Pass-through, but entity must file informational Form 1120S with the IRS, distribute Schedule K-1 to each owner and file all Schedule K-1s with the IRS

B Corporation Origins

Corporate law and culture are based on profits

Corporate law and culture in the United States are fundamentally motivated by profits and not really tailored to address the situation of a for-profit company that actually wants to pursue a social mission. While some corporations do in fact give back to society through donations or community programs, traditionally, all corporate decision-making is usually justified in terms of maximizing profits for the benefit of the owners or shareholders.

Let’s say for example that the directors and officers of a farm operation decide to set a significant portion of land aside as a conservation easement instead of cultivating it for profit. If a shareholder of that company is not happy with their return on investment and he sees that the directors are prioritizing environmental concerns above profits, they could raise issue with the directors responsible for such a decision. It’s unlikely that a court would step in and say that the officers and directors were somehow wrong. This is because the courts generally defer to the judgment of directors under the “business judgment rule.” In short, as long as the decision is reasonable and made with care, it will hold muster in the eyes of the court. The directors could certainly make a case for such a decision if it will result in tax credits for the company or good marketing based on the goodwill earned in the public eye. Nevertheless, directors and officers still feel pressured by the profit demand of the shareholders. After all, the shareholders vote for the directors, and a hostile takeover could ensue if they’re not ultimately happy.

B Lab created the B corporation to highlight a social purpose

The point is that many people do not agree with having to go through the exercise of justifying all decisions based on profits to meet the demands of shareholders. While most business owners realize that it’s important for a company to make profits, many are increasingly recognizing that it’s just as important to give back to society and not decisively exploit people and the environment. Let’s say that Farmer John wants to set up a chicken farm. In addition to making a profit, Farmer John wants to make sure that his business (1) is environmentally sustainable, (2) treats the chickens with the highest animal husbandry standards, and (3) gives 50 percent of its profits back to the local community. Farmer John could very well do this under the traditional C corporation or LLC entity. However, if he were to ever sell his business, he would have no way of guaranteeing that his social-purpose motive would be carried on by the new owners.

In an attempt to alleviate the traditional corporate law constraints on entrepreneurs who care about social and environmental causes, B Lab, a Pennsylvania nonprofit corporation, created the benefit corporation. Unlike the traditional corporation, a “B” or benefit corporation is a legal structure that requires the company’s management to make an overall positive impact on society and the environment. It permits management to take into consideration social and environmental factors when making decisions as much as or more so than making a profit.

At first the benefit corporation was a product of B Lab and was not officially recognized by state corporation statutes. So, B Lab functioned as a third-party certifier. A company that wanted to be recognized by the public as a benefit corporation would file an application with B Lab. B Lab would have the company answer an extensive list of questions to ensure that the company is truly following its stated general benefit goal. It also required the company to change some of its formation and organizing documents to include provisions declaring the social purpose. If the company did all of this, including paying a small fee, it would officially be recognized by B Lab as a certified B corporation.

States began recognizing B corporations in mass

Meanwhile, B Lab created model laws and worked diligently with state legislatures across the country to advocate for legislation that would expressly recognize the benefit corporation. They have done an amazing job. The first state to adopt the benefit corporation was Maryland on April 13, 2010. Now, in just five years, 32 states plus the District of Columbia have passed statutes allowing for the creation of benefit corporations in their state or district.

Basic Characteristics of a B Corporation

The B corporation shares the same governance structure as the C corporation– shareholders, directors and officers. It also protects the personal assets of the owners from the business’s liabilities as long as the corporate formalities are upheld, just as with the C corporation and the LLC business entities. In addition, the B corporation structure embodies three main pillars that govern the company: purpose, accountability and transparency.

Declare a social purpose

While traditional corporations have the single duty to maximize profit, benefit corporations have the increased purpose of considering society and the environment in addition to seeking a profit. A farm operation that decides to form a B corporation must declare their commitment to creating “general” public benefit. In most state B corporation statutes, this general purpose is defined as “to pursue the creation of a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” A farm operation could also declare a “specific” social benefit, such as “The corporation is organized for the purpose of furthering sustainable food systems.”

Establish accountability with the board of directors

To ensure that the company is being held accountable for pursing its declared social purpose, the B corporation form expressly requires directors to consider society and the environment when making decisions. In addition, the B corporation state statutes provide shareholders with a right to sue the directors should the shareholders determine that the directors are deliberately making decisions that are directly counter to the stated social purpose. These “private right of action” provisions are much like the accountability elements of traditional corporations; however, they include the consideration of society and the environment in addition to profit.

Maintain transparency with the public

In addition, B corporations can’t simply say they’re going to serve a social purpose. They have to show and tell the public how they are actually doing it. This is primarily done through an annual benefit report that explains how the corporation pursued a general or specific social benefit and includes an assessment of its efforts measured against a third-party standard. It’s up to the company to choose the third-party standards, and the standards will vary depending on the industry and the social goals. For example, in the sustainable farming community, two third-party standards that have been used by B corporations include the Food Alliance certification and the Sustainable Farm certification. In addition, B Lab has a tool called the “B Impact Assessment” where companies can measure their success and progress toward certain social goals.

The exact requirements of the annual benefit report vary from state to state. Most states require the annual benefit report to be issued to shareholders and to be made available on the B corporation’s public website. In addition, many states require the B corporation to file the annual report with the state. Overall, this transparency element prevents the B corporation from becoming a vehicle for what’s known as “greenwashing,” or simply vowing a commitment to environmental stewardship through marketing and advertising while going about the business of making a profit with little regard for the corporation’s environmental impact.

Forming a B Corporation at the State Level

If your farm operation is located in the District of Columbia or one of the many states that recognized the B corporation, you have the option to form one officially. This process is very similar to forming a C corporation. It follows the same governance structure: directors, officers and shareholders. It also requires the same formation and governing documents: articles of incorporation and the bylaws. Be sure to review the chapter on C corporations (Chapter 5) for more details on forming and upholding a corporation, as this chapter only covers aspects that are unique to the B corporation.

Note that one of the drawbacks of a B corporation is that some fear that the stated social purpose will make it challenging for the entity to raise funds from outside investors like venture capitalists and angel investors who want to maximize the return on their investment. Others point out that more and more investors are intrigued by a triple bottom line goal, and some are particularly attracted to the B corporation structure because of the social gains. If your farm operation anticipates a need to obtain financing from outside private investors, be sure to thoroughly investigate the implications of forming a B corporation.

Create and file the articles of incorporation that include a social purpose
You’ll need to file articles of incorporation with your state just as you would for a C corporation. The only difference is that you’ll need to be sure you’re using the B corporation form, if there is one provided by your state’s business registration office. Otherwise, you’ll need to create your own document and include the specific B corporation language. A quick internet search for “benefit corporation and [your state]” should get you the information you need to get started. B Lab also has a helpful state-by-state resource on its website called “How to Become a Benefit Corporation.” The link is provided in the resources section at the end of this chapter.

Basically, to achieve B corporation status at the state level, the articles of incorporation must declare the B corporation status. For example, at the top it could say: “Articles of Incorporation for Local Fruit Farm, Inc., A Benefit Corporation.”

In addition, the articles must declare a general social benefit purpose. This is usually specified in the statute. The language that must be included for the general purpose is typically something like: “to pursue the creation of a material, positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.” If the company decides to designate a specific purpose as well, it must be included in the articles of incorporation. An example of a specific purpose is: “The corporation is organized for the purpose of furthering sustainable food systems.” Or it could be even more specific such as Farmer John’s stated purpose above: “to operate the business in a way that ensures that it (1) is environmentally sustainable, (2) treats the chickens with the highest animal husbandry standards, and (3) gives 50 percent of its profits back to the local community.”

Include the B corporation purpose and provisions in your bylaws

The bylaws, which is the organizing document of the B corporation, must also include your declared social purpose. In addition, the bylaws should include a provision that specifies the requirements for preparing the annual benefit report, as specified by the state B corporation statute. This will serve as a helpful reminder to the board of directors and the shareholders of this legal requirement. Finally, the bylaws could include a provision that firmly protects the social purpose.

If, for example, the bylaws require only a majority vote of the shareholders or the directors to amend the bylaws or articles, the social purpose is at risk if a shareholder or group of shareholders that is opposed to the social purpose somehow obtains more than 51 percent interest in the company. They could simply vote to amend or even erase the social purpose. By including a provision that requires a consensus or supermajority (i.e., two-thirds majority vote) to amendor end the social purpose, the founding owners’ social purpose motive is better protected. Some state B corporation statutes actually set the minimum threshold to a supermajority. If this is the case, you would not necessarily need to include a separate provision in the bylaws, as the state law would govern. However, including it would serve as a reminder to the directors and the shareholders of what is required for an amendment.

Electing federal tax status

Being a benefit corporation does not affect the tax status of a company. A company can still elect to be taxed as a C corporation or an S corporation. Be sure to review these chapters of the Guide before deciding what tax status is best for your farm operation should you decide to form a B corporation.

Implementing Best Business Practices for Your B Corporation

Prepare an annual benefit report and file it with the state, if required

To abide by the transparency provisions, all B corporations are required to create an annual benefit report. The report must be given to the shareholders and made available to the public by posting it on the company’s website. Many states also require the B corporation to file the annual benefit report with the state, and some require a small fee (around $45).

States vary in what is required to be included in the annual benefit report. Typically, the report is a narrative description that must include (1) the short- and long-term goals of the corporation with respect to its social purpose(s), (2), the significant actions taken in the past year to achieve these goals, (3) future actions the corporation expects to take to achieve the goals, and (4) an assessment of the company’s social and environmental performance measured against a third-party standard. According to the Model B Corporation Legislation, which many states have adopted, the third-party standard must be comprehensive, independent, credible and transparent.

There are more than a dozen third-party standards that have been used by B corporations to meet the requirements of their annual benefit reports. As previously mentioned, third-party standards that are particularly relevant for farm operations include Food Alliance certification and Sustainable Farm certification. Food Alliance certification is governed by Food Alliance and it provides comprehensive third-party certification for social and environmental responsibility in agriculture and the food industry. Sustainable Farm certification is governed by Sustainable Agriculture Network, which promotes efficient and productive agriculture, biodiversity conservation and sustainable community development by creating social and environmental standards.

Obtain required licenses and permits

Just as for any business entity, certain registrations, licenses and permits maybe required. Most cities and many counties require all businesses to register and get a business license or a tax registration certificate, which may also require the business to pay a minimum tax. States may also require the farm business to get a seller’s license before selling anything to the public, and the local planning board may require the farm business to have a zoning permit depending on the location of the farmland. All these forms are pretty straightforward.

Follow through with all other requirements as if you were a C corporation
The above points are unique just to B corporations. Keep in mind that a B corporation will have to uphold all corporate formalities to maintain the entity’s integrity and to protect the shareholders’ personal assets from the business’s liabilities. This includes holding annual meetings and taking minutes, keeping separate bank accounts, filing annual fees, preparing and filing annual tax forms, obtaining required licenses and so on. Be sure to also read Chapter 5 on C corporations in conjunction with this chapter if you decide to form a B corporation to ensure that you are abiding by all that is required.

Becoming a Certified B Corporation

Becoming a “Certified B Corporation” is different than becoming a B corporation at the state level. B Lab, the nonprofit organization that created the benefit corporation model, handles the Certified B Corporation certification process. This is akin to third-party organic certifiers like Oregon Tilth, CCOF, Midwest Organic Services Association, etc. However, it is a bit different. Unlike organic certifiers, which require just the baseline of what the USDA organic standards require, the B corporation certification often goes above and beyond what the state benefit corporation statutes require. It provides yet another level of accountability and transparency. It also provides companies with a level of marketing, as the Certified B Corporation stamp has become somewhat of an icon over the years. Companies like Patagonia, Kickstarter and Method Products are all Certified B corporations.

Becoming a Certified B Corporation is relatively simple if your company is already abiding by a social and environmental mission. First, you have to complete the B Impact Assessment and earn a minimum score of 80 out of 200 points. The B Impact Assessment has three main sections. The environmental section evaluates a company’s products, operations (materials, energy use, facilities, emissions) and supply chain. The community impact section evaluates the social impact of the company’s products; the fair labor and local focus of its supply chain; employee, supplier and ownership diversity; volunteerism; and charitable giving. The worker section examines a company’s relationship with its workforce, including the company’s compensation, benefits, training programs, ownership, management/ worker communication, job flexibility, corporate culture, and health and safety.

Next, you have to meet the legal requirement by forming an appropriate entity in your state. The best way for companies to meet the legal requirement is to use the benefit corporation legal entity if it is available in your state. B Lab prefers this corporation structure because its formality lends itself better to the accountability and transparency mechanisms that are required. If the B corporation entity is not yet available in your state, or if for whatever reason you decide not to form one, the next best option is to form an LLC. The flexible LLC structure allows owners to adopt a social purpose and to include the purpose as well as the distinct decision- making, accountability and transparency principles in the operating agreement without being counter to the state LLC statute. At first, many of the original benefit corporations certified by B Lab were formed as LLCs.

The third and final step of becoming a Certified B Corporation is to sign and submit the B Corporation Declaration of Interdependence and Term Sheet with B Lab along with the required annual fee. The fee is based on your company’s annual sales. See the B Lab website for fee information.