Guide to the Law for Social Enterprises, B Corporations, Benefit Corporations, etc. in the United States
This is part of our Guide to Laws for Business Owners and Entrepreneurs.
A social enterprise is a newer kind of business that is based on both “doing good” as well as making a profit. Imagine that!
A social enterprise is not a radically different business structure, but is more of a modification on the traditional structures. Be sure to read our Guide to Business Structures for the basics.
If you’re an aspiring social entrepreneur, be sure to talk to a lawyer who has worked with social enterprises. It is a new area, so even many lawyers are not familiar with it.
What is the legal definition of a social enterprise?
There is no precise definition of social enterprise. It is It ranges from a for-profit business that engages in corporate social responsibility (CSR) or cause marketing, to even non-profit organizations that use business models such as selling products at market rate. Some, but not all, social enterprises get certified as a B Corporation, and/or operate under a special kind of legal entity such as a Benefit corporation.
Here are the various types of social enterprise:
- For-profit business + corporate social responsibility/cause marketing
- Mission-driven for-profit business that focuses primarily on making a positive impact on society and/or the environment, while also earning profit
- Non-profit organization + business enterprise model
What is a B Corporation?
A B Corporation (often abbreviated “B Corp”) is a business or organization that has been certified by the non-profit organization B Labs as meeting certain requirements as to various aspects related to the environment, the community, and employees. It is not the same thing as a Benefit corporation, which is a legal structure. A company can be a B Corporation without being a Benefit corporation. A company can also be a Benefit corporation without being a B corporation.
In fact, a company can be an LLC or other entity that is not a corporation and still be a “certified B corporation.” Another common confusion is that a B Corporation is not an alternative to a C or S Corporation. In fact, if a B Corporation is a corporation at all (which it doesn’t have to be), it generally is also a C corporation or S Corporation. So it would be either B + C corporation, or B + S corporation.
What is a Benefit corporation?
A Benefit corporation is a particular type of legal structure for a business. It is based on a regular corporation, with a few modifications. The biggest difference between a benefit corporation and a regular corporation is that the benefit corporation expands the allowable activities. To explain this, we need to briefly discuss the basis of a corporation.
A regular corporation is legally obligated to maximize value for its shareholders. This means that if the corporation is doing things that may make slightly less profits than it could, the shareholders can sue the corporation to stop this. For example, if the corporation wants to focus its efforts on a lower income market, it may be legally restricted from doing so.
In contrast, a Benefit corporation removes this restriction, and allows – and requires – the corporation to pursue both a profit and a positive impact on society and the environment. The shareholders of a Benefit corporation may not sue simply because they are not making as much profit as they could.
The Benefit corporation structure is available in 37 states (as of January 2021). See more about California Benefit corporations.
One potential area of confusion is that there is another type of structure called a public benefit corporation, which is very different. A public benefit corporation is generally a non profit entity, which operate under very different rules than for profit entities.
Another common confusion, like with B Corporations, is that Benefit Corporation is not an alternative to a C or S Corporation. A Benefit Corporation generally is also a C corporation or S Corporation. So it would be either Benefit + C corporation, or Benefit + S corporation.
Is a Benefit Corporation the same as a B Corporation?
Nope! A Benefit corporation is a legal structure, while a B corporation is a certification which goes on top of a legal structure. Here’s a venn diagram:
What are the benefits to being certified as a B corporation?
- marketing: customers appreciate it
- discounts: many businesses cater to B corporations and offer them discounts
What are the disadvantages to being certified as a B corporation?
- the annual fee is $1,000+ depending on the company’s revenue
- the requirements for certification are somewhat strict
What are the benefits to being structured as a Benefit corporation?
- Reduced legal liability for directors and officers when considering non financial interests of the company, environment, and community
What are the disadvantages of being structured as a Benefit corporation?
- Potential legal liability for directors and officers for failing to consider the environment or other constituencies in making certain decisions.
Do B corps or Benefit corporations have tax advantages?
- Unlike non-profits, B corps and Benefit corporations are not tax exempt. But they may be able to deduct charitable giving as a business expense, rather than simply as a charitable deduction
Is there anything else in particular that social enterprises should know about the law?
Other than the structure of the business, most other business law generally applies to social enterprises. See our full Guide to the Law for Business Owners.
Read our full Guide to the Law for Business Owners
Find a good business lawyer who has worked with social enterprises.