Traditionally, business owners have had the same few choices when it comes to incorporating. Either go unincorporated (as a sole proprietor or partnership), or form an LLC, S or C corporation. The differences between these various entities typically come down to taxation, the ability to have foreign shareholders and which corporate formalities must be followed. None of them specify what a given company's values and commitments are - until now.

Enter the B corporation (or 'Benefit Corporation.') It's a new legal structure that designates a business as 'socially responsible.' Unlike a standard S or C corporation, B corporations exist to codify explicit commitments to societal stakeholders.

Origins

The B corporation is a relatively new development. Created in 2006, the entity was first conceptualized by Pennsylvania firm B Lab. Essentially, the B corporation was envisioned as a way for any company to codify and advertise its commitment to 'socially responsible' business practices. Becoming a B corporation occurs only after a lengthy certification process during which companies are evaluated on social and environmental matters.

As B Lab's 'sneak peek' indicates, large companies are made to fill out a 26 pageassessment containing questions pertinent to corporate governance, employee compensation, energy usage, manufacturing practices, charitable giving and more.

The assessment includes multiple choice questions and also some open-ended questions calling for 2-3 sentence responses. A company's mission statement, for instance, is evaluated for social commitments and promises. Whether a company has been fined in the last three years, whether employees receive a 'living wage' and whether its products 'promote the arts, sciences or the advancement of knowledge' are other items weighted by the B corporation assessment criteria.

Not every business needs to fill out the entire assessment, however. As B Lab explains, 'a manufacturing company answers more questions on their environmental footprint than a service company' and the assessment changes based on company size. In any case, the purpose of the assessment is to 'distinguish good companies from good marketing.' Companies qualify for B corporation status if a minimum score of 80 (out of 200) is achieved. Re-certification occurs every two years thereafter.

Differences Between S & C Corporations

As noted, the other long-standing corporate entities differ mainly in terms of taxation and corporate formalities. While S corporations feature flow-through taxation, C corporations involve a corporate income tax in addition to the personal income taxes of the owners. S corporations are also limited in how many foreign shareholders they can have. C corporations have no such limits. Accountants and tax attorneys frequently advise prospective business owners on which entity is best suited to their unique corporate needs.

As of yet, B corporations lack an official tax status distinguishing them from S or C corporations. In fact, B corporations are not yet a full replacement of those long-time entities. Reportedly, however, efforts are underway to change that. The Christian-Science Monitor reported that B Lab founders proposed taxing B corporations at lower rates to Obama administration officials in 2009 to encourage more widespread adoption.

Life as a B corporation also involves obligations to stakeholders outside the company, including community and environmental organizations. Each state and corporate entity has its own unique legal framework that must be agreed to before a company is B corporation certified. At minimum, every B corporation must amend its governing documents to 'redefine the best interests of the corporation to include the consideration of employees, consumers, the community and the environment.' Additionally, businesses wishing to remain B corporations are required to pay yearly licensing fees to B Lab. Finally, the amended documents must be officially recognized and filed with your Secretary of State.

Popularity

Despite the unproven and still-evolving nature of the B corporation, the concept is rapidly catching on. According to B Lab, there are currently over 300 B corporations which earn more than $1.1 billion in annual revenue across 54 different industries. B Lab maintains a frequently updated list of every company currently certified as a B corporation. The cause won a major victory in April 2010, when Maryland became the first state to formally recognize B corporations as official entities. Vermont followed suit in June, becoming the second.

In an OutdoorNews.com press release, it was clarified that 'qualified shareholders can sue a for-benefit corporation for failing to produce' the various social benefits provided for in the charter. Nor do Maryland and Vermont figure to be standing alone for very long, as it appears lawmakers in New York, Pennsylvania, North Carolina, Colorado, Washington and Oregon have 'significant interest' in passing B corp legislation. Meanwhile, Philadelphia has taken the lead by becoming the first city to offer tax incentives to B corporations and already houses 41 of them, according to SustainGenuity.

The Future

It remains to be seen whether the B corporation has staying power or becomes a passing fad. Early adoption is impressive for an entity that is barely four years old. In all likelihood, the future of the B corporation will depend on how well it withstand legal scrutiny. Some experts have pointed out that it could be difficult to uphold a B corporation's ambitious and far-reaching charter in court. Assuming such fears fail to materialize, the B corp could be here to stay.