What Up, B? Is a Benefit Corporation Right for Your Startup?

It’s hard to believe that five years have past since Arizona allowed new businesses to form as “B” corporations here in our State.  While the bulk of my work with startup companies still involves more traditional corporations and LLCs, lately I’ve witnessed an uptick in interest from startup founders asking about organizing as a B corp.  I believe this trend will continue as the appetite for ethical corporate governance and good corporate citizenship continues to grow.  So what is a B corporation anyway?

The B Corporation: What It Is and Is Not

For those that don’t know, the “B” in B corporation stands for “benefit” (or, more specifically under Arizona Revised Statutes §10-2402, a “general public benefit”).   Think of these entities as (with apologies to the late President Bush) kinder, gentler for-profit corporations with motives for being in business that are in addition to simply maximizing company profits.

Notable B corp examples include “Fat Tire” brewer New Belgium Brewing Co., ice cream maker Ben & Jerry’s, and outdoor apparel and equipment maker Patagonia.  

Shareholders in a B corporation are (presumably) aware of this and accept that their business has dual or multiple motivations that go beyond just maximizing shareholder value at the expense of everything (and everyone) else.

To be clear, unlike the ubiquitous C- and S-Corporations common in the startup world, the B corporation is not a tax status contained in the Internal Revenue Code, or an election you can make to choose how you want the corporation to be treated for tax purposes by the IRS.  

Instead, organizing as a B corp is a product of your particular state’s law authorizing such a legal entity (as Arizona’s Benefit Corporation Act does) and, assuming you want your B corporation to be certified as one, a certification/re-certification process through entities such as B Lab (itself a non-profit).  I touch on taxation further down in this article.

How to Form a B Corporation in Arizona

Under Arizona law, the purpose behind a B corporation has to be for a “general public benefit,” i.e.,  “a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard”.

If you choose, your B corporation can also name as its purpose “specific public benefits”, which are enumerated in §10-2402(5), such as providing low-income or underserved communities with beneficial products or services, protecting the environment, or promoting the arts, sciences or advancement of knowledge, just to name a few.

The process for forming a B corporation is very similar to that of forming a regular for-profit corporation here in Arizona.  An incorporator (or incorporators) have to fill out and file Articles of Incorporation and pay the $60 filing fee (or $95 for expedited processing–highly recommended).

You will want to make sure that your articles of incorporation comply with the formation requirements of §10-2403 and -2404, as well as having a compliant annual benefit report meeting the requirements of A.R.S. §10-2441 and -2442.

The initial charter will have to be adopted by your Directors and shareholders at an initial organizational meeting, in addition to all of the other corporate housekeeping to-do’s like adoption of the corporation’s Bylaws, appointment of corporate officers, etc., etc.).

Advantages of a B Corporation

In addition to the obvious limited liability characteristics you get with a traditional corporate form, the B corp has some potential advantages.

As the new kid on the block, B corporations are definitely hip, trendy, and cutting edge, potentially allowing your startup to stand out from the crowd (and perhaps its larger, more traditionally organized and governed competitors).  In other words, Identifying as a B corp could be a way to publicly claim your identity as an organization interested in both its own shareholders’ and non-shareholder stakeholders’ success.  

Forming up as and earning B certification can also have the benefit of helping your consumers cut through the marketing hype and ever-increasing “green washing” in business to find your business and its products which are actually socially and environmentally responsible.  

In addition, because the B corp certification process comes up every few years, the periodic assessment itself can help keep your corporation’s leadership stay on top of improvement opportunities within the company, not to mention ideas coming from, and potential collaborations with, other leaders in the B corporation business community.

Lastly, while I am not a tax attorney or accountant, it does appear that the IRS will allow a business validly formed as a B corporation to elect (assuming it qualifies) to be treated as a C- or an S-Corporation for Federal income tax purposes.  Potential founders interested in the B corp should always consult with a qualified CPA or tax advisor, and certainly before taking any steps toward the actual formation. (Those Corporation Commission filing fees are not refundable!)

Disadvantages of a B Corporation

Under Arizona law at least, in addition to the regular annual report and filing fee which must be filed with the Corporation Commission every year, every B corporation is also required to file an “annual benefit report” with the ACC describing what general public benefit your company provided, as well as pay an annual benefit report filing fee.  

While the additional filing cost of the report is negligible, as a founder or co-founder you need to take into account the cost of your or your staff (or your attorney’s) time to have to draft and amend this report every year.  

In addition, the hip, trendy-ness of the B corp is not always such a good thing—at least from the standpoint of we stodgy lawyers.  The fact that B corps have only been around a little over a decade means that the entity is still too new to have built up a body of reliable court decisions interpreting B corporation laws, director and officer actions, shareholder rights, etc. 

There is reason to believe that the courts would follow or adapt traditional for-profit and non-profit corporations law on many of these potential issues, however that can’t be taken as a given. We attorneys (as well as the business clients we advise) dislike uncertainty and prefer to have case opinions and amicus curiae briefs we can look up and cite. 

Similarly, it’s unclear (at least in my own experience) how receptive the angel investor and venture capital community is to the concept of investing in B corps, although it’s possible that this concern may not be as serious as one might initially think.  Nevertheless, founder teams thinking about forming as a B corp should be prepared to explain the what and why of their corporate structure in both their deck and in their meeting with investors. 

BHANDLAW, PLLC routinely assists startup founders and early stage company directors and management teams, including those interested in forming as B corporations or in need of guidance on governance issues. For more information, feel free to contact me at the phone number or e-mail address below or use the contact form to the right.

Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a Phoenix business and technology law firm working with start-up companies, creative intellectual property, Internet and digital media matters, and complex corporate M&A and technology transactions.  Ben can be reached at (602) 222-5542 or by e-mail at bbhand@bhandlaw.com