A New Choice in Entity Selection

A New Choice in Entity Selection

One of the first questions any lawyer who works with startups receives at the initial meeting with a new client is “What type of entity should I (we) form?” Historically the answer came from one of three options – C corporation, limited liability company or, more rarely, S corporation.  A more detailed posting on the primary (and secondary and tertiary, etc.) differences between the three entity types than I’d ever the attention span to post can be found here.

My advice generally has been a Delaware C corporation if your company is going to be looking for funding from outside investors and a Delaware LLC if your company is going to be bootstrapped or funded solely by friends and family.  Recently, however, a fourth option has been added to the mix, particularly for those companies whose likely investors will come from the socially responsible investing (SRI) world – a benefit corporation.

For those who haven’t heard of them yet, benefit corporations (not to be confused with B Corps – more on that later) are a relatively new type of corporation now permitted to be formed in four states – Maryland, Virginia, Vermont and New Jersey – with a fifth, New York, likely on the way before the end of summer and other states likely to follow.** Benefit corporations are like C corporations in many respects. The two principal differences are significant, however.

First, the existing and contemplated benefit corporation laws provide that benefit corporations are accountable not only for shareholder returns, but also for having a positive impact on society and the environment. For instance, under the Maryland statute, the first one adopted, benefit corporations are required to provide public benefits such as “preserving the environment” and “improving human health.” It further requires that benefit corporations’ social and environmental performance be assessed by an independent third party that meets certain required standards

Second, the benefit corporation statutes generally permit boards and managers to consider factors other than shareholder returns when making corporate decisions, and instead allow them to consider the impact of such decisions on a variety of stakeholders – including not only shareholders, but also employees, communities, consumers and the environment. The hope is that by insulating managers from liability for considering factors other than solely shareholder returns, those managers will be able to focus on creating long-term value – not only for shareholders, but for other stakeholders as well.

A further step down the road for startups who plan on operating in the “triple bottom line” space (people-planet-profits) or who intend to seek funding from SRI investors is to seek certification as a Certified B Corporation™ (or a B Corp, as they are colloquially known, and not to be confused with benefit corps, also often called B corps in blogs and media reports). B Corp certification comes from B Labs (one of the driving forces behind the adoption of the benefit corporation statutes nationwide). B Corp certification requires, among other things, a self assessment, an assessment review by a B Labs team, delivery of supporting documentation and random reviews of continued compliance. Complete details can be found at the B Corp website. B Corp certification is not necessarily as easy or inexpensive as the B Labs website would lead you to believe (one article dealing in some detail with the process can be found here), but B Corp certification is looked on favorably in the SRI world and would satisfy the independent third party assessment requirement of the benefit corporation statutes. As benefit corporations become more prevalent you can expect other certifying entities to follow.

Benefit corporations are not for everyone. In particular, if you’re in a triple bottom line or other green business but expect to seek investment from traditional angels or venture funds, I’d advise you tread carefully, as benefit corporations are still too new (Maryland’s statute, the first, was only adopted in April of last year) to know how those investors are going to react to them. But, if your likely source of funds will come from the SRI world, then you should consider forming as a benefit corporation and possibly seeking B Corp certification.

**Update - as of January 2013, 10 states have passed some form of benefit corporation legislation - California, Hawaii, Illinois, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont - and DC has introduce a bill authorizing benefit corporations.

1 Comment

tinagleisner - July 10th, 2011 at 12:58pm

It might be new, it might be small but this is a positive sign that ultimately our US business models need to shift away from greedy corporations to businesses that as you say, serve the 3 stakeholders - people, planet