B Corp Legal Formation
Creating your B Corp Legal Entity, Purpose Structure, and Capital Structure
The B Corporation certification legal requirement varies by jurisdiction, providing entrepreneurs with a different set of choices based on the nexus of operations and jurisdiction for incorporation. Each option will have different implications for purpose structure, tax treatment, and governance mechanics.
B Revolution assists clients with selecting the appropriate legal entity, creating the appropriate purpose structure, and negotiating key terms with investors and among shareholders. Where appropriate we also assist with complex structures, such as non-profit/for-profit Joint Ventures, exempt entity formations for charities and foundations, and parent-subsidiary and licensing relationships.
New Entity Formation costs vary by jurisdiction, but typically range between $1500-3500 for a comprehensive package that typically includes some or all of:
- Choice of Jurisdiction Analysis
- Choice of Entity Analysis
- B Corporation-Compliant Entity Formation and Filing
- Public Benefit Purpose Definition Exercises
- Authoring of Purpose Provisions and Creation of Purpose Structure
- Counsel on Board Meeting Process
- Compliance Training
- Selection of Indemnification Provisions
- Shareholder Agreement
- Share Subscription Agreements
- Share Certificates
Unrivaled Expertise in the Benefit Corporation Legal Entity
In 2010, B Lab pioneered a new type of legal entity, the benefit corporation, in the State of Maryland. The central thesis for what has become one of the fastest-spreading legislative movements in the history of corporate governance and entity structure has been that, for the past several decades, entrepreneurs and investors have been constrained by the “profit maximization norm,” which requires ventures to focus narrowly on profit creation rather than value creation. The benefit corporation legal entity frees entrepreneurs to make values-based decisions, benefitting stakeholders alongside shareholders in what has been dubbed the “shared value” approach to competitive strategy. In 2010, B Revolution Founder Dirk Sampselle drafted the legislative memorandum used to advocate for the entity’s adoption, which has occurred now in nearly half of the United States.
Protect your Mission and Comply with Certification
B Revolution, in affiliation with its associated law firms in relevant jurisdictions, assists startups with selecting the appropriate legal entity, structuring the appropriate purpose provisions, and counseling board members through the capital formation and board governance processes. We understand the importance of mission centrality, and how to embed into the legal structure the unique coupling of social and environmental impacts with profitability in order to pave the road for sustainable scalability. We are also deeply familiar with the B Corporation certification requirements for legal compliance, as well as other less obvious overlaps between the certification and key aspects of legal structure and governance.
We take into consideration all the relevant factors before proposing options for legal structuring, and ensure entrepreneurs understand the advantages and disadvantages, risks and rewards of each option. Each factor must be considered closely in the context of each unique enterprise and business model so that our clients can achieve a lasting legal structure that protects the mission and achieves the desired impacts and profitability.
What a Benefit Corporation Is
A benefit corporation is a legal entity, like a corporation or an LLC. It is formed by filing a formation instrument with the appropriate Secretary of State. In states that do not yet have a benefit corporation statute, a benefit corporation may be formed in a foreign jurisdiction, or a domestic LLC may be formed with equivalent language.
Key facets of the benefit corporation statutes include:
- Corporate purpose of creating a “general public benefit”
- Ability to specify a corporate purpose of a customized “specific public benefit”
- Third-party reporting requirements
- Directors and Officers are both allowed, and accountable to, considering a general public benefit in their actions and decisions
What a Benefit Corporation is Not
Forming as a benefit corporation legal entity does not guarantee B Corporation certification. Benefit corporations can choose from any of hundreds of third-party certifiers, of which B Corporation is one. A benefit corporation can become a B Corporation by becoming certified.
Why Become a Benefit Corporation?
Several advantages stem from becoming a benefit corporation:
- Ability to pursue a public benefit purpose in addition to creating shareholder wealth
- Ability to specify a specific purpose for the corporation to uphold
- A differentiating factor from other businesses: you have public purpose “baked in” to your corporate legal DNA
- Branding benefits from becoming a B Corporation if you so choose
- Investor familiarity once more benefit corporations have been formed and funded
What are the Risks of Being a Benefit Corporation?
With all rewards come risks.
The benefit corporation requires directors and officers to consider stakeholders and public benefit in their decision-making. This can make commonplace decisions difficult.
Shareholders may have a right of action against the corporation if directors or officers do not consider the public benefit. Although most states limit the remedy to non-financial actions for these rights of action (i.e., directors and officers cannot be forced to pay money for failing to consider a public benefit), defending such lawsuits will cost the corporation money and time.
Each state’s benefit corporation statute is different, and each state’s case law interpretations of those statutes will differ. Selection of the appropriate state is an essential consideration when forming a benefit corporation.
How can I reap the rewards and mitigate the risks?
Carefully crafting the language of the Articles of Incorporation and Bylaws of the benefit corporation to suit the organization’s desired decision-making process can help mitigate legal risk and put shareholders on notice of decision-making policies. By structuring the corporate purposes clearly and defining a purpose hierarchy, directors and officers can have a clearer path to understanding how to balance stakeholder considerations when making key decisions.
B Revolution advisors are experts in the benefit corporation legal entity and have advised dozens of startups on all matters related to benefit corporations, including:
- Board formation
- Benefit officer and director selection
- Board decision-making processes
- Purpose structuring
- Selection of third-party certifier
- Corporate record-keeping and decision monitoring
- Annual reporting and impact measurement
Leveraging the Market with a 501(c)(3)
Most entrepreneurs do not know that their 501(c)(3)s can earn a profit, and that their profit-earning operations may not even be taxable if the way that they earn profit is in furtherance of the organization’s charitable purpose. Even if the operations are taxable, there are many scenarios in which undertaking commercial activities within the charity may serve to bolster the financial bottom line.
Do you have a business concept that can bolster your charitable mission? Do you need help conceiving one that will align with your tax strategy?
B Revolution advisors help develop business models to fund charitable impacts, and work with B Revolution affiliate attorneys to maximize profit while minimizing tax liability.
Creating a Brand-Aligned Foundation for your Benefit Corporation
Many benefit corporations undertake corporate philanthropy as part of their pursuit of public benefit. In some circumstances, it is wiser to negotiate a relationship with an existing established charity; in others, it is beneficial to establish a separate foundation through which the for-profit entity can channel its assets towards a charitable goal.
Some considerations entrepreneurs should undertake when deciding on this facet of legal strategy include:
- Tax liability for earned income
- “Substantial nonexempt purpose” risk of commercial activities housed within a tax-exempt entity
- Private inurement concerns if benefits from the tax-exempt organization flow to the for-profit corporation
- “Prudent man” investment constraints if the tax-exempt organization contributes capital to the for-profit corporation
- The cost of establishing dual entities
- The nature of the relationship between the tax-exempt organization and the for-profit corporation
In addition to traditional for-profit and non-profit legal set-ups, entrepreneurs have an increasingly diverse array of alternatives from which to choose, including:
- Flexible Purpose Corporations (available in CA only)
- L3Cs, or Low Profit Limited Liability Companies (available in
- LLC (Limited Liability Company) B Corporations
- Benefit Corporations
Entrepreneurs may also wish to reap the benefits of both donative and investment capital by establishing a “hybrid” organization structure, combining separate for-profit and non-profit entities in any of the following manners:
- Joint Venture (a for-profit and a non-profit form a single legal entity, with each joint venturer making specified contributions and earning specified returns)
- Parent/Subsidiary (a non-profit owns a for-profit in whole or in part)
- Contractual relationship (the operations of the for-profit and non-profit are housed within separate entities and are related only by contract or licensing agreement)