An Analysis of the B Corporation Legal Requirements
One of the most common questions I get – “what is the difference between a B Corporation and a benefit corporation?” – is sometimes followed-up by the equally-important but less-frequently-asked question, “how do they relate to one another?” To address this nuanced question, I’ll proceed in two parts: first, a summary of the B Corporation certification’s legal requirements, and second, a summary of the benefit corporation statutes’ third-party requirements. In other words, what legal adjustments, if any, do I need to make in order to become a certified B Corporation? And, if I am a benefit corporation, what are my third-party-standard requirements, viz what are the statutory requirements related to reporting or performing according to standards set by third-parties?
B Corporation Legal Requirements
First, as I have explained in detail before, the B Corporation certification is a certification, not a legal entity. However, “B Corporation” used colloquially may refer to any business which has achieved the certification, and by inference, it may also refer to the legal architectures that are permitted and/or required by the B Corporation certification standards. So, “are you a regular corporation or a B Corporation” is, in a sense, an appropriate and accurately-stated question given that the certification imposes some legal requirements. So what is the legal architecture that businesspeople and sustainability activists refer to when they say “that company is a B Corporation, not a regular corporation”?
Generally, B Corporations can take one of two legal forms: a Limited Liability Company (LLC), or a Corporation (in other words, you could become a B Corporation that is not in fact a corporation at all, but rather a company – a limited liability company). There are important distinctions between an LLC and a corporation that I will not cover here, but suffice it to say that both of those forms provide the level of governance oversight and accountability required for achieving the B Corporation certification.
More specifically, the requirement that the B Corporation certification imposes on corporations and LLCs is actually to simply amend the governing documentation to “’embed” mission and stakeholder considerations into the “legal DNA” of the business. Below I discuss the different requirements for what to embed, how, and where.
If you choose to be a B Corporation LLC, the requirement is actually quite simple, and uniform across all states: you must simply amend your operating agreement to contain the language specified by B Lab, which essentially states that you will consider your stakeholders to the extent allowable by law. There are no other legal requirements for becoming B Corporation certified.
The requirement is a bit more complicated if you desire a true corporate form. Because the law of corporations varies state by state, the requirement for achieving B Corporation certification actually depends on the state in which a B Corporation is incorporated or formed. Bear in mind that a business can be formed in a state in which it is not actually headquartered or operating. There are two factors that determine the legal requirements to achieve B Corporation certification as a true corporation: first, whether the state has a benefit corporation statute, and second, whether the state has a constituency statute. I’ll discuss constituency statutes in my follow-up post as well – suffice it to say that the constituency statute is a separate statute that affects how mission-centered decision-making might be interpreted by the courts of the state.
Here’s the breakdown according to those two factors:
In non-constituency-statute states which have not yet passed the benefit corporation legislation, no intra-corporate legal adoption is required: rather, when the assessment process is completed with B Lab, the entity will enter into an agreement with B Lab to consider its stakeholders to the maximum extent allowable by law. B Lab provides the list of stakeholders. The business doesn’t have to amend its articles. (AL, AK, AZ, AR, CO, DE, KS, MI, MT, NC, NH, OK, TX, UT, WA, or WV)
In non-constituency-statute states which have passed the benefit corporation legislation, corporations seeking to preserve their corporate structure while achieving B Corporation certification must become benefit corporations. Traditional corporations that are existing or prospective B Corporations have two certification cycles (two to four years) to adopt the benefit corporation form. For example, company A becomes certified on 1/2/13. Benefit corporation legislation is passed in company A’s state of incorporation on 1/3/13. Company A has until 1/2/17 to transition into the benefit corporation form (the end of the certification term after the current term). Counterexample: company B becomes certified on 1/2/13. Benefit corporation legislation is passed in B’s state of incorporation on 1/1/15. Company B has until 1/2/17 to transition into the benefit corporation form. (CA, SC, and VA)
In constituency statute states which have not yet passed the benefit corporation legislation, prospective B Corporations seeking to keep their corporate structure must simply add a provision to their articles stating that the board will consider the stakeholders of the corporation; B Lab provides the list of stakeholders. (CT, FL, GA, ID, IN, IA, KY, ME, MN, MS, MO, NE, NV, NM, ND, OH, OR, RI, SD, TN, WI, or WY)
In constituency statute states which have passed the benefit corporation legislation, prospective B Corporations seeking to keep their corporate structure have two options. The first option is to keep the traditional corporation – and not transition to become a benefit corporation – but to adopt the mandated stakeholder consideration language. The second option is to become a benefit corporation under the state’s benefit corporation statute. (IL, LA, MA, HI, MD, NJ, NY, PA and VT)
B Lab’s legal roadmap is available here.