Last week, Fred Wilson from Union Square Ventures wrote about Kickstarter's transformation into a Benefit Corporation in his blog. A Benefit Corporation, or B-Corp integrates social causes into its objective, similar to Non-Profits, but remains nearly all the other features of an C-Corp or S-Corp, and can choose to be taxed as either.
Of course, the question is, why would corporations need to integrate a built-in social cause into its objective? After all, part of the vision of Founders often sets the corporate culture and objectives, and many C-corps naturally incorporates the triple bottom line into their ideology.
However, there are some legal arguments that could be made that provide reasons why a B-Corp is much more advantageous for start-ups that a traditional C-Corp or S-Corp. One primary reason is that it shields the Directors from lawsuits by shareholders and third parties. I made the following chart here as a general guide.
One argument for B-Corps is that Founders/ Directors can make decisions on liquidity, acquisition or other fiduciary matters in which they are shielded from potential lawsuits by shareholders. The most cited case is when Ben & Jerry's had two offers of acquisition- one from a similar company with the same environmental objectives, and the other higher offer was from Unilever. Eventually, Ben & Jerry's chose to be acquired by Unilever because of fears of impending lawsuits against the Directors had they chosen to be acquired by the other company with the lower offer; also their board had a legal responsibility to their shareholders to choose the higher offer despite the fact that the Founders did not want to sell the company. Truth be told, although this is an standard example, in a lot of cases, I think it is more common that the CEO is blamed then fired rather than a lawsuit against all the Directors. Clearly this was the case when Microsoft wanted to acquire Yahoo! for $47 billion and former CEO Jerry Yang refused, which caused much criticism and eventually led to his dismissal, or rather, his "resignation".
In either case, a B-Corp is clearly more advantageous than a traditional corporate model because it effectively shields the Founders and Board members from making decisions that might not be in the best financial interests of the company, but that rather takes into account the social responsibility of the company. (I have to add a note here that despite Ben & Jerry's acquisition by Unilever, and its transformation into a B-Corp in 2012, that the acquisition itself wasn't such a bad thing after all since Unilever kept Ben & Jerry's mission in tact.)
In the UK, the CIC (Community Interest Company) is often compared to the US B-Corp, however if we take a closer look, the CIC is actually closer to the US 501(c)(3) Non-Profit than a B-Corp. The CIC is something of a hybrid between a traditional UK Charity and a Limited Liability Company. However, the CIC allows Directors to have a salary whereas in a Charity, the positions of Directors are entirely voluntary. Also the legal entity of a charity is the same as its members and Directors, so that Directors can be directly sued by third-parties, although these sorts of lawsuits against Charities in the UK are quite rare, compared to the US, where litigation runs rampant in every sector under any possible circumstance.
In my humble opinion, if entrepreneurs or Startup Founders with social motivations had to choose between a CIC or a regular Ltds I think it would be more advantageous to choose the latter. Although CICs are a hybrid between Charities and Ltds, there is a maximum cap on dividend payouts and profit distribution that would not be appealing for investors. In addition, in a traditional charity, tax relief can be applied to donations, whereas the CIC is considered similar to a Ltd in structure, which puts it into a unique position where it cannot benefit from private investors nor have the same advantages as charities by giving tax relief.
Although the Benefit Corporation structure is one that has its roots in social causes, so do Non-Profits, and there have been mass reported cases of fraud and misuse in regards to the latter (eg, American Breast Cancer Foundation, United Way, Kids Wish Foundation et al). The list of corrupt Non-Profits in America is disturbingly unending, despite the fact that there are many (such as NPR) that are highly regarded.
I think one should keep in mind that although the B-Corp should ideally have a Board of Philosopher Kings, who are collectively working towards the common good of the people and the environment, that any company can mask itself as mimicking those same causes, whilst taking advantage of its position of being effectively shielded by lawsuits.
UK charities, on the other hand, because they have such stringent fidiciary reporting measures and voluntary Board of Directors, do not suffer from the corruption that high profile US Non-Profits are known to have. In fact, I myself, had such bad experiences with US Non-Profits that I often become suspicious when someone tells me he or she is starting a US Non-Profit or some sort of "Foundation". Of course, there are many good Non-Profits as well, and I am probably not doing them any justice in this entry, but generally I find 'philanthropy' in the US often has a double-edged sword, and one that is highly motivated by profit. Many people may not be aware, but the Gates Foundation has often been criticised as a shell corporation and acts as a for-profit entity.
Currently there are approximately 1,500 B-Corps in the world, with over 10,000 CICs in the UK and 1.5 million Non-Profits registered in the US. Despite whichever corporate designation that startup Founders may use, ultimately, it is up to the Founders and Board of Directors to drive the vision, not a company designation. Let's hope that B-Corps can overcome the corruption that has plagued many US Non-Profit entities, and be able to do the kind of incredible work that many charities have done in the UK, whilst still being profitable entities that are interested in the triple bottom line.
By Sierra Choi