The Business of Social Enterprise: Intro to B Corporations

By Ryan Hamilton

More than ever, for-profit businesses today are striving to highlight their ethical sourcing, environmental consciousness, and positive influence on society. For consumers, the question of whether they are supporting a true social enterprise or being misled by savvy marketing is sometimes difficult to answer. But, it is a question that businesses can take steps to address upfront. One way businesses do this is through Benefit Corporation designation. For clarity, there are two different types of B Corp designation. The first is a third party certification, similar to Fair Trade. The second is a state-created business entity that requires meeting environmental and social standards not required of a typical corporation. Both types of Benefit Corporation are explored further below.

Any type of business entity, whether an LLC, a partnership, or corporation, can become a certified “B Corp” This third party certification is provided by a nonprofit organization called B Lab. To get started, the business must complete a questionnaire about its business practices, including questions about impacts on the environment, public service involvement, community support, treatment of employees, and diversity in the workplace. This process is similar to the local Sustainable Small Business designation offered here in Pittsburgh through a group called Sustainable Pittsburgh. To maintain B Corp status, though, the business must also add specific B Corp language to the company’s organizational documents. This language mandates how shareholders or directors are required to consider the social, environmental, and wider economic impacts of their decision-making. Notably, even if your business isn’t working with B Lab to become a certified B Corp, you can work with an attorney to add similar language to your organizational documents (such as operating agreements) that will help you meet the same goals.

The Benefit Corporation is actually a statutory business form meaning that state law recognizes the entity formed as a legitimate business and in some ways regulates how it will operate. In 2013, Pennsylvania became the 12th state to recognize Benefit Corporations as legal entities. Today, 31 states have passed legislation supporting Benefit Corporations and five states are in the process of considering similar legislation. Generally speaking, a Benefit Corporation differs from a standard corporation because the Benefit Corporation is required to 1) create a material positive impact on society and the environment, 2) meet higher standards of accountability, and 3) be transparent by reporting its overall social and environmental performance using recognized third party standards. Unlike nonprofit status, however, Benefit Corporation designation does not impact a company’s tax status. The Benefit Corporation designation is meaningful because it hinders the company from abandoning their social mission both while original founders are still active with the company and in a scenario where the company is sold or a new investor steps into the picture. Traditionally, a corporation’s goal (and the corporate officer and director duties) are focused on enhancing shareholder value to the exclusion of all other considerations. In fact, there are legal protections in place so that shareholders are ensured the corporation makes decisions with only the shareholders’ financial interests in mind. The Benefit Corporation is designed to reduce these legal requirements and allows a corporation (and shareholders) to embrace a mission of societal good, along with profits.

Both the B Corp designation provided through B Lab and the formation of your business entity as a Benefit Corporation under state law are ways that business owners can relay to consumers that they are truly interested in operating their for-profit business in a way that creates positive and sustainable impacts on the community. For many consumers, this can demonstrate that vows of social enterprise are not just empty marketing promises, but actually, a new way of doing business.