What is "Pending" B Corp Status?

Why can’t I get certified as a B Corp right away?

Many startups seek B Corp certification as a marketing tool and as a visible sign of the company’s desire to operate in a sustainable manner. B Lab—the nonprofit organization that issues the B Corp designation—views the B Corp seal as a reflection of actual business practices rather than aspirational goals. Consequently, companies with under 12 months of operations are not eligible for B Corp certification.

Previously, a new company wanting to secure B Corp certification simply had to wait until it had a full year’s worth of operations to submit its application to B Lab. That’s certainly still an option; however, B Lab has introduced a separate “Pending” status that, for a fee, allows a new company to begin the process of obtaining a B Corp certification while advertising that in-process status to stakeholders and customers.

It should be noted that Pending B Corp status is only available to companies that have fewer than 12 months of operations. If a company is more than a year old, it must pursue full certification instead of Pending status.

Why might I want “Pending” status, and how do I get it?

As mentioned above, a Pending B Corp is permitted to use a special B Corp logo signifying to investors and customers that it is on track to securing full B Corp status. Companies looking to tap into socially conscious venture funds or leverage B Corp status in marketing might find it worthwhile to pursue Pending status. Another advantage to starting in Pending status rather than waiting the required year to apply is that the company has immediate access to B Lab’s extensive community of Certified B Corps and can leverage some of the program’s partnerships. Lastly, securing Pending status through the application process (discussed in more detail below) ensures that the company meets the legal accountability requirement for being a certified B Corp, which could be more efficient than amending corporate documentation after the company has operated for a year.

Applying for Pending B Corp status is much simpler than the full certification process. Instead of the in-depth assessment review process that’s used to obtain certification, the process to secure Pending status is meant to assist the applicant in structuring its operations for the following year with an eye toward meeting the requirements for full certification.

The only two steps in securing Pending status are (i) ensuring that the company meets the legal requirement for B Corp certification and (ii) submitting a prospective B Impact Assessment. The legal requirement component ensures that the company’s management is legally required to consider the impact of corporate decisions on all stakeholders, including any identified public benefit purpose. The particulars of the legal requirement depend on the state of formation and entity type.[1] The second step—completing a B Impact Assessment[2]—involves filling out a detailed questionnaire on how the business will operate in a way that will further its public purpose and the metrics against which the company plans to measure its performance and progress.

After completing the steps listed above, the applicant simply pays a one-time fee ($500 as of May 2020) and signs a program agreement before becoming eligible to use the Pending B Corp logo.

How do I move from a Pending to Certified B Corp?

A startup can graduate from Pending to Certified status if it has a verified score of at least 80 on the B Impact Assessment within 12 months after securing Pending status. To get that verified score, the company must update the prospective B Impact Assessment it completed when applying for pending status to obtain a self-assessment score and complete an assessment review via phone with a B Lab representative, after which time the company will receive an updated score. If that updated score is over 80, B Lab will select certain questions and ask the company to provide documentation for the answers it provided. If the final score is still over 80, the company moves to Certified status after paying the applicable annual fee.

If you’re interested in applying for Pending B Corp status, I’d love to help. Feel free to reach out to me on how to get started.

[1] https://bcorporation.net/certification/legal-requirements

[2] https://app.bimpactassessment.net/login

B Corp Certification: is it worth it?

What is B Corp certification, and how is it different from a benefit corporation?

If you’ve done much research on benefit corporations, you’ve probably come across the B Corp certification program offered by the nonprofit organization B Lab. But what is the certification, how does it differ from a benefit corporation, and is B Corp status right for your business?

It’s easy to get confused between what it means to be B Corp certified and what it means to be a benefit corporation. As discussed in this blog post, benefit corporations are a distinct type of legal entity under state law. Much like traditional C-corporations or limited liability companies, state laws provide specific rules for formation and operation with the relevant agency (generally the Secretary of State). These rules may extend from items benefit corporations must include in the corporate charter to ongoing reporting requirements to stakeholders and/or the public. An additional complexity is that benefit corporations have only been authorized in 30 states plus the District of Columbia; companies located in another state are not able to form as benefit corporations in their home jurisdictions.

By contrast, B Corp certification is not a legal designation, and the process is not administered by any governmental entity. Consequently, certification is available to companies structured as LLCs, C- and S-corporations, benefit corporations, or partnerships. While some elements of the certification process mirror the benefit corporation statutes (e.g., the requirement that company’s governing documents include a commitment to consider social sustainability), B Corp certification requires a more in-depth assessment of performance in achieving social sustainability than is typically necessary to establish as a benefit corporation.

What are the benefits of being a certified B Corp?

Many entrepreneurs enjoy the camaraderie aspect of B Corp certification. Certified B Corps have access to exclusive discounts through B Lab’s partnerships, and B Corps are encouraged to collaborate on issues of common interest through events such as an annual retreat. As the public awareness of B Corp certification expands, many companies are also using their certifications in their marketing, publicity, and investment solicitation efforts. For example, Union Square Ventures, a self-styled “thesis-driven venture capital firm”, cited Etsy’s B Corp status as matching the firm’s ethos of sustainable marketplaces.[1] In response to studies showing that employees want to work at socially responsible firms, companies have also begun using their B Corp statuses in recruitment efforts.

Companies that are already benefit corporations choose to become B Corp certified for an even more practical reason. Many state benefit corporation statutes require that a company measure its impact against a third-party standard in the reports it is required to issue to the public or to its stockholders.[2] As the most widely recognized social impact endorsement, B Corp certification will likely meet the statutory third-party requirement and provide a framework for ongoing compliance with the state.

How does the B Corp certification process work?
 
1. Performance Assessment

The first step to receiving a B Corp certification involves completing B Lab’s online B Impact Assessment. Taking between 1-3 hours for small businesses, the assessment analyzes the impact of a company on its stakeholders by asking questions relating to governance, workforce, community, and environment. The exact questions asked in the assessment will depend on the size, sector, and geography of the firm completing the assessment. Upon completing the Impact Assessment, the company will receive a B Impact Report containing an overall baseline score.

After the initial assessment, a representative from the company must schedule an assessment review phone call with a B Lab staff member. Prior to the call, the company will be asked to submit additional documentation for some of its answers in the Impact Assessment (this may include policies and procedures, time records, or other data to back up the assessment responses). The 60-90 minute call allows the B Lab staff to clarify the company’s responses and discuss the supporting documentation that has been submitted.
If the impact score is above 80 on a 200 point scale after the assessment call, the company may be asked to provide additional documentation. From there, in order to meet the transparency requirements of certification, the company must complete a disclosure questionnaire that confidentially discloses sanctions, fines, or certain practices to B Lab. (B Lab notes that most responses are minor in nature and do not require further action.) Background checks are also performed on the company and its founders/executives. Upon completion of those steps, the company is awarded the B Corp certification.

It should be noted that companies must go through a recertification process every two years. While less extensive than the initial assessment, the process does require the completion of a new Impact Assessment and may involve the submission of additional documentation. In addition, 10% of B Corps are audited every year via an in-depth review that can take between 6 and 10 hours.

2. Legal Setup

Although not run by a government agency, one of the B Corp certification’s major ideals is furthering long-term sustainability into corporate DNA. In other words, B Lab wants to make sure that B Corp certified companies stay true to their sustainability missions even as the company expands, new investors come in, or the company undergoes an ownership change.

Consequently, B Lab sets out specific steps that corporations and LLCs must take in order to 1) give directors and officers the freedom to consider the public interest—not just stockholders—when making decisions and 2) create a framework to allow stockholders to hold leadership accountable to consider sustainability and the public interest. The steps will generally involve amendments to the governing documents, which will require stockholder or member approval; however, the particular requirements vary by state and by entity type.

Since benefit corporation statutes provide for the protections and framework listed above, however, benefit corporations do not need to complete any additional legal setup during the certification process.

How much does it cost to get a B Corp certification?

In addition to the administrative costs associated with the certification process, B Lab charges an annual fee based on the B Corp’s annual sales, with the minimum fee for 2020 set at $1,100 for companies with sales under $150,000. By way of further example, companies with $10mm in annual revenue will pay a certification fee of $6,000 in 2020. B Lab is also developing a discount for companies whose majority owners are from underrepresented backgrounds, so make sure to ask about a discount if you think you may qualify.

Should my company become B Corp certified?

The question as to whether your company should complete the B Corp certification process has several facets. If you are already established as a benefit corporation, you may want to become certified to meet statutory requirements in your state of incorporation; however, you could also likely meet those requirements through other, less expensive means. If you are not a benefit corporation, you might choose to complete certification to show your commitment to sustainable principles while maintaining your current company structure. Alternatively, your goal could be to use your certification to attract talent, capital, or customers to your business. Still other entrepreneurs considering B Corp certification will choose to develop more informal and less expensive methods of promoting sustainability in their operations.

If you’re still unsure whether your company should be a benefit corporation and/or a certified B Corp (or neither), talk to an attorney experienced in this area for more information.


[1] http://www.usv.com/blog/b-corporation
[2] See, e.g. Neb. Rev. Stat. §§ 21-403; 21-413. 

Benefit Corporations: a primer

Introduction to benefit corporations

You’re an aspiring entrepreneur with a passion for some cause, and you’re trying to figure out how to join those two distinct and seemingly disparate worlds.

When a prospective client like you walks into my office, he or she almost universally ends the narrative with “…and so I need to form a nonprofit.” In discussing that point, I ask if the individual is comfortable funneling all profits back in toward supporting the organization’s cause instead of pulling them out of the company. That’s where the conversation usually stalls a bit and I will hear something along the lines of “Well, I’m really committed to this cause, but I still want to be able to have a growing business that will help finance my retirement.” Therein lies the problem.

Is there actually a way that the ideas of profit and social good can coexist? Yes, at the nexus of those ideals is a new form of entity known as a benefit corporation.[1] A benefit corporation is a traditional, for-profit corporation with a twist: it has a commitment to sustainability or a more specific issue or cause embedded in its DNA.

A benefit corporation is a great way to combine an entrepreneur’s desire to create a growing and profitable business with a commitment to some social good. In fact, some of the most recognizable brands in the world have chosen to become benefit corporations: Patagonia, Etsy, Warby Parker, and Ben & Jerry’s, just to name a few.

What makes a benefit corporation attractive?

You might be wondering why a company would choose to form as a benefit corporation instead of just using the traditional C-corporation structure and crafting a mission statement around the cause the company wanted to further. There are actually a few reasons. First, corporate law generally requires directors to place profit above all else. If the directors of a traditional C-corporation make a decision that accomplishes some social good to the detriment of the company’s profits (e.g., paying more for environmentally-sustainable materials), stockholders could view that action as a breach of the directors’ fiduciary duties to maximize profits and could potentially even launch a suit against the company. Directors of a benefit corporation, by contrast, are directed to take social and environmental impact into account when considering actions, insulating them from those potential liabilities.[2]

Another reason an entrepreneur might find the benefit corporation structure attractive is to ensure that the social impact mission remains even if the company is later sold. As we’ll discuss later, it is relatively difficult for a benefit corporation to remove the designation once it is in place. Lastly, there just is not an alternative to the benefit corporation. Nothing in any corporate statute commits companies to operate in a sustainable or socially-conscious manner, so an entrepreneur or founder team can use benefit corporation status as a way to hold themselves accountable for making responsible decisions.

In addition to reduced director liability, stockholders have expanded rights to hold the company accountable to the mission or impact statement set forth in its formation documents. It’s important to note, however, that these rights extend only to stockholders. For example, stockholders in a benefit corporation with the express mission of conservation might be able to bring a claim against the company for failing to consider conservation in its activities; however, the Sierra Club, a nonprofit organized for the purpose of protecting and promoting responsible use of the environment, would not be able to assert the same claims.

Benefit corporations may also find that their status gives them advantages in the marketplace. Not only can benefit corporation status be used as a marketing tool to show that a company has backed up social consciousness with action, potential employees—particularly millennials—may be drawn to companies that reflect the values they hold dear as individuals. Lastly, benefit corporations might have greater access to private capital than equivalent C-corporations, as value funds or other investors focused on social impact choose to invest in companies with a long-term, demonstrable interest in good corporate citizenry.

Formation and governance

Once I describe the advantages of a benefit corporation to a potential client, the discussion usually shifts to the technical formalities surrounding formation. It’s important to note that benefit corporations are not authorized in all states. No need to worry if your state isn’t one of them, though: you can still incorporate in a jurisdiction that permits benefit corporations and qualify to do business in your state (albeit that qualification would be as a traditional corporation).

It’s easy to form a benefit corporation. You file either articles or a certificate of incorporation with the requisite office (usually the Secretary of State) in the state of incorporation. The certificate or articles must state that the corporation is a benefit corporation and may also identify a specific public benefit (e.g., “improve education among the public relating to child development”).

The identification of a specific public benefit in the incorporation documents is really at the core of embedding the mission into the company for the long-term. Why? Although you can amend the articles of incorporation just like you can with a C-corporation (e.g., with a majority stockholder vote), it takes a specific statutory threshold to change provisions relating to public benefit. Nebraska, for example, requires a two-thirds vote of each class of stock, voting separately, to remove a public benefit provision from a company’s articles of incorporation, irrespective of what other voting rights each class has.[3] So if you have a nonvoting class of stock, those stockholders still actually do have a vote when it comes to removing the benefit provision.

Depending on your jurisdiction, you may also be required/permitted to appoint an independent benefit director to gauge and report progress you have made on your impact goals. In addition, you can also appoint a benefit officer to assist with any reporting obligations.

Where to form the benefit corporation?

When deciding where to domicile your benefit corporation, the ongoing compliance and reporting costs are likely to be a major concern for you. Most of my clients want to maintain the most flexible and lowest-cost benefit corporation structure; however, there are a few for which additional reporting obligations are not a concern, as they view the additional transparency as part of the social contract with their stakeholders. In determining which jurisdiction might be best for your corporation, let’s analyze the differences between two states: Nebraska—where I’m located—and Delaware—where most of my clients ultimately choose to form their benefit corporations.[4],[5]

The heart of the benefit corporation lies in the requirement that the corporation publish periodic reports indicating how its actions have advanced general public benefit and the specific benefit outlined in the company’s incorporation documents. Although both Delaware and Nebraska require reports to be prepared, there are substantial differences in the level of detail each state requires. A Nebraska corporation must select a third-party standard to assess the company’s performance in furthering public benefit and must also include an assessment of social impact against that standard in a report. Delaware corporations may, but are not required to, use third party standards in assessing performance.

The level of transparency and accessibility of benefit reports varies dramatically between Delaware and Nebraska as well. Nebraska benefit corporations must prepare their report annually, while Delaware companies are only required to publish a report biennially. In addition, a Nebraska corporation must file the report with the Secretary of State and either publish it on the company website or provide it free of charge to any person that requests a copy of the report. Delaware, by contrast, does not require that the report be filed with any state agency and provides that only stockholders have a right to receive the document.

Closing thoughts

A benefit corporation might be for you if you are committed to positive social or environmental impact and you want service and conscientiousness embedded into your company’s DNA. If instead you want to run a profitable business and simply donate to a charitable organization, perhaps a traditional C-corporation is better for you. And if your biggest focus point is not creating a business but rather assisting a particular cause, your best bet might be to explore the nonprofit route.

Once you decide that a benefit corporation is right for you, you’ll want to decide what specific benefits will be at the heart of your mission. Existing C-corporations will want to make sure that (a) benefit corporations are permitted in their jurisdiction of incorporation and (b) they have sufficient stockholder approval (generally 2/3) to make the transition to a benefit corporation. New ventures should consider where to form the benefit corporation: if reduced reporting obligations are important to you, you might pick a state like Delaware for your incorporation. If, on the other hand, you do not mind additional transparency and reporting, you might select another state, such as Nebraska. In any event, a lawyer experienced in this area can walk you through the decision-making process and help you select a form of entity and jurisdiction that’s right for you.


[1] Being structured as a benefit corporation is different than achieving “B Corp” status from an organization such as B Lab. B Corp certification may be available to companies incorporated in states that do not recognize benefit corporations (i.e. C-corporations), but certification involves a more expensive and time-consuming process than simply adopting the legal status of a benefit corporation.
[2] It is important to note that although benefit corporation directors are free to consider impact in addition to profit maximization, they are not free to completely disregard profits and do still owe fiduciary duties to stockholders. 
[3] Neb. Rev. Stat. §§ 21-403(8); 21-406.
[4] The Nebraska Benefit Corporation Act is codified at Neb. Rev. Stat. §§ 21-402 et seq, and the corresponding Delaware law is codified at Del. Code Ann. 8 Del. §§ 361 et seq.
[5] Note that incorporating in a state other than one where your company has a physical presence will incur additional expense, as your firm will need to register as a foreign corporation with your home state.