Nonprofit Isn’t the Only Option: Benefit Corporations, B Corps and More
First, let’s acknowledge the elephant.
Yes, the name of this site is Nonprofit Hub, but not all good in the world is done by nonprofits. Occasionally, the nonprofit business model is not the right setup for your organization.
Sometimes you have investors that help get your operations off the ground and want a share of the profits. You might want more control of how the decisions are made or the company is run. Or you might not want to open your financial books for public review. Other times the nonprofit model just isn’t the right fit. (Contrary to some beliefs, you shouldn’t pick your organization type just so you can get paid. Nonprofit professionals should get paid a reasonable wage just like people in the private sector.)
In another post, we reviewed the different types of nonprofits and the regulations for each type. Here is a guide to several types of private organizations that could be right for your organization.
For most businesses money is the overriding factor. However, benefit corporations are different in that their decisions are driven by impact. Most private corporations make decisions based on how they affect the bottom line and, in turn, the shareholders. The directors have a legal responsibility to maximize the profits of the organization and ensure the long-term viability of the organization.
While those factors are also a consideration for benefit corporations, which is a legal designation for a company, directors also must consider the impact of their decisions on society and the environment. A benefit corporation’s purpose might be similar to a 501(c)(3) in that they are required to make a positive impact on society or the environment. Beside the ability to share profits with officers and shareholders, a benefit corporation might be a more attractive option because it could draw more investors and employees as a mission-driven organization. Plus, as a private company, it can be active in politics without restrictions.
As a result of their wider purpose, benefit corporations also require more transparency to its shareholders and the public. Actual reporting requirements vary from by state, but BenefitCorp.net published a list of best reporting practices, which includes:
- Details on general and specific benefits created during the past year,
- Circumstances that have hindered the creation of benefits, and
- An assessment of the overall social and environmental performance against a third-party standard.
Benefit corporations are a fairly new concept, as Maryland was the first state to allow the designation in 2010. The downside is that benefit corporations aren’t available everywhere. As of September 2015, 31 states have passed legislation, while others are working on it.
Certified B Corp
The names might appear similar, but the difference between a benefit corporation and a certified B Corp is significant. A benefit corporation is a legal designation, while the certified B corp is a designation provided by a third party.
Becoming a B Corp requires just three steps. First, your organization completes an impact assessment to determine the effect it has on the community in four segments: governance, workers, community and environment. After receiving that score you compare it to others and create a plan to improve the score.
The second step is meeting the legal requirements, which will provide protection to the director and board members. This step includes updating your mission statement, gaining board and shareholder approval for the changes and filing the amended articles with the secretary of state.
Finally, your organization signs the B Corp Declaration of Interdependence and Term Sheet.
While many of the benefits are the same, differences exist between a benefit corporation and a Certified B Corp—mainly in the performance of the organization. It is important to note that your organization does not have to choose between being a benefit corporation and a Certified B Corp, as it can be both.
- Certified B Corps must achieve a minimum verified score on the B Impact Assessment and be recertified every two years against evolving standards. Benefit corporations do not have an objective minimum requirements and no ongoing verification once they are incorporated.
- Certified B corps are available to any kind of organization, while benefit corporations are not available in all states and limited to corporations.
- The filing fees for benefit corporations range from $70-$200 depending on filing fees, while the B Lab certification fees start at $500, and can cost as much as $50,000 if your company has more than $1 billion in sales.
Organizations are not limited to just nonprofit or benefit corporation status. Another option is to create your company as a normal privately-held corporation. However, it isn’t that simple, as you still have plenty of options to choose from when forming your organization. Here is a brief overview of the other options:
- S Corporation: This corporation does not pay federal income tax, but the shareholders must report the income or loss on the individual taxes. This option is most commonly used for small businesses, as they cannot have more than 100 shareholders, who are all United States citizens.
- C Corporation: This is the most common type of corporation. It provides basic protection of shareholders and is a separate legal entity from the owners.
- Limited Liability Company: This category is not a corporation, but instead a business structure that provides the taxation status of a partnership or sole proprietorship with the limited liability of a corporation. While an owner report profits and losses on their taxes, they are protected from personal liability from business debts.
- Low-Profit Limited Liability Company (L3C): This option is a form of an LLC geared toward impact-driven companies. It bridges the gap between nonprofit and for-profit and allows owners to accept donations and program-related investments, or PRIs. It is still a for-profit entity so they can still make profits, and donations and PRIs are not tax deductible.
Between the different nonprofit choices and the options for private companies, you should take time to explore the possibilities and think about your finances, organizational structure and possible tax implications. Then, you will be better equipped to chose the right setup for your organization to make a difference in the world.