THE BLOG
08/28/2013 05:02 pm ET Updated Oct 28, 2013

Are Benefit Corporations the New Limited Liability Company?

Benefit corporations are slowly becoming more well-known as analysts continue to discuss what kind of an influence they will have on corporate America. But if you don't know what a benefit corporation is, B-Corps are essentially created so that the executives or directors of a standard corporation are allowed to consider the impact that their decisions will have on the environment and society. Benefit corporations still have a fiduciary responsibility to make money, but profit does not have to be the exclusive goal. In fact they are legally required to show how they created a public benefit in order to stay in compliance.

The last legal business structure to make this kind of splash was the limited liability company. Though first recognized in Wyoming in 1977, it took more than 20 years before every state had legislation recognizing the LLC, and there was quite a bit of debate over how to view LLCs, and whether or not the structure was a passing fad. Today, LLC formation outpaces corporate formation by nearly two to one, but will benefit corporations, being the newest structure in the incorporation neighborhood, show the same type of growth? Or is the B-Corp, as the LLC structure was initially charged as being, just a passing fad?

Legal recognition is blazing through the states.

The first legislation recognizing the benefit corporation was passed in Maryland in 2010. In just three short years, 19 states and the District of Columbia have enacted legislation to recognize the B-Corp. Compared to the 20-odd years it took LLC legislation to catch on, the B-Corp is absolutely blazing through the states. However, there is a very good reason for that speed - taxes. B-Corps aren't given any special tax breaks or benefits. In fact, they are taxed just like any other corporation is. LLCs, on the other hand, at first didn't have a set tax structure, though the IRS originally settled on taxing LLCs as partnerships. However, by 1982 the IRS was pushing for a rule that would deny "partnership" tax status to any business entity wherein members bore no responsibility for the business's liabilities. Six years later in 1988, the IRS issued a new ruling saying it would rescind the previous ruling and tax LLCs as partnerships, prompting states to begin recognizing the LLC again. If legislation is passed to give benefit corporations some sort of tax break, the IRS could become involved and the rate of adoption may slow down. But, as it stands, there is little standing in the way of widespread recognition.

There are some benefits to the Benefit Corporation.

Profitable businesses have shown time and time again that they can have a positive impact on the world. Both major corporations and smaller businesses help fund charities, scholarship opportunities, and by and large do provide a public good. Benefit corporations protect entrepreneurs that want to pursue that public good, even when the business's social mission cuts into its profits. There are also investors that are more than happy, and are actively looking, to back socially and environmentally conscious businesses. The B-Corp structure helps assure those investors that the business won't sacrifice its beliefs to chase down the almighty dollar. There is nothing wrong with making money, but there are less-than-scrupulous ways to make more of it -- and benefit corporations are founded to help executives and directors resist pressure to follow that path.

Formation rates remain low.

Despite the cultural shift toward socially aware businesses, the formation rates for benefit corporations still remain pretty low. It's difficult to pin down how many benefit corporations have been formed as some states do not record their formation separately from regular incorporations, but the data collected by the social-entrepreneurial blog SocentLaw indicates that fewer than 300 "benefit entities" have been formed. It seems that many entrepreneurs just aren't willing to adhere to the regulations and reporting requirements placed on benefit corporations. There aren't any tax breaks given or filing fees waived -- if you form a benefit corporation, you are doing it solely for the protection it provides while you continue to pursue your business's social mission. Of course, as more people discover benefit corporations and figure out what they are there for, the numbers should go up. Education in this area will be critical to increased adoption. Nevertheless, as it currently stands, B-Corps represent a tiny minority of all corporations.

Are benefit corporations the new LLC? Ultimately, the answer here is not yet. Legislation is still pending in some states, and in many other states laws to recognize the B-Corp haven't even been introduced. Benefit corporations are a great idea, but it will take greater awareness, tax perks like the pass-through tax structure given to limited liability companies, and further interest from angels and VC investors to continue to expand this structure. But the fact that any corporation is so committed to a social or environmental mission that its directors are willing to adhere to B-Corp requirements is extremely inspiring. As time goes on, hopefully more people will found their own benefit corporations so they can bring in a steady profit for their business and make their mark on society.