Today, more companies are choosing to pursue a social mission than ever before. And while the traditional approach of setting up a charitable organization is often viewed as the best option, other approaches do exist, offering the ability to balance a corporate commitment to social good with for-profit ownership. No longer the exclusive domain of 501(c)(3) tax-exempt organizations, socially-focused, for-profit companies are flourishing, in large part due to the support of consumers, shareholders, and even venture capital firms, many of which have fund portfolios earmarked for such projects.
If you are contemplating a socially-driven business model, the two most common for-profit options are (1) organizing as a benefit corporation (in some states, a public benefit corporation) and/or (2) maintaining your existing corporate structure and becoming a certified B corp. Understanding these options and how they differ from a traditional charitable organization can help you choose the structure best suited for your specific business.
Charitable Organization
Charitable organizations, also known as 501(c)(3) public charities, are corporations that have applied for and received a specific type of tax exemption under IRS Code. These organizations do not pay tax on income they receive that is related to their charitable missions. They are usually incorporated as nonprofit or nonstock corporations, and are required to meet strict criteria in order to maintain their charitable status. Well-known charities include The Nature Conservancy, Habitat for Humanity, and Feeding America.
Benefit Corporation
A benefit corporation is for-profit entity (specifically, a type of C corporation) with a public benefit purpose. Available in several states, including California and Delaware, these entities are organized to operate in a way that benefits the public by equally balancing the interests of shareholders, stakeholders, and the corporation’s social mission. This “tri-partite” model is the core difference between benefit corporations and traditional C Corporations, which are focused solely on maximizing shareholder value. Some well-known benefit corporations include Patagonia, Ben & Jerry’s, Eileen Fisher, and Kickstarter, as well as such publicly traded entities as Lemonade, Inc. (financial services), Zymergen, Inc. and GreenLight Biosciences (both biotechs), and Coursera (education).
Certified B Corporation
A certified B corporation is a designation given to companies that agree to hold themselves accountable to a public benefit commitment. Certification is given through a third-party organization, B Lab, that has set certain social benefit criteria that must be met in order to receive the designation. Any kind of corporation, not just a benefit corporation, can apply for B corp. certification. Well-known B corp.-certified companies include The Body Shop, Bombas, Athleta and Danone S.A. has obtained B Corp certifications for some of its subsidiaries.
The below chart compares these 3 structures to help leaders choose the best option for their next venture.
| Type of Entity | Description | Considerations |
501(c)(3) charitable organization | Usually incorporated as nonprofit corporation or non-stock corporation There are no owners; and funds are essentially public trust funds. Revenue (not “profit”) inures to their charitable purpose. Exempt from federal (and usually state) tax, which can facilitate donors receiving a charitable tax-deduction in connection with their donation. | Although a natural fit with a socially conscious mission, 501(c)(3)s can be difficult and costly to operate and maintain. For example. when charities or certain foundations raise tax-deductible funds, they must comply with IRS rules regulating the acknowledgment of such donations, and cannot provide any goods or services in exchange for the donation. They are also regulated by most states, and must register to solicit donations and provide annual reporting on such donations to state charity officials. Some fundraising activities are considered “unrelated business activity” (e.g. events, auctions, concerts, sales of merchandise, ticket sales), and income derived from them can be subject to a tax as Unrelated Business Income Tax, or UBIT When a charity engages in too much unrelated activity, it risks losing its charitable status. Sponsorship income and trade show/convention activities are exempt from UBIT |
| Benefit Corporation | For-profit companies that have a public benefit purpose and are organized to operate in a way that benefits the public. Known as either Benefit Corporations (in MA and other states) or Public Benefic Corporations or PBC (in DE and other states), these entities are not tax-exempt, but still further a purpose that is socially conscious. Requires certain socially conscious commitments in governing documents, as well as special reporting obligations. | Important considerations include: Some states require periodic reports detailing the company’s public benefit impact. In Delaware, directors of a PBC must manage the entity in a way that balances: (1) the pecuniary interests of the stockholders; (2) the best interests of those materially affected by the PBC’s conduct; and (3) the specific public benefit or public benefits identified in the PBC’s certificate of incorporation. Benefit corporations may face restrictions on their sale since the public benefit purpose is embedded in governance of the company. |
| B Corp certification | A traditional corporation or LLC can seek B-corp certification which essentially holds them accountable for their chosen public benefit commitment. Certification is handled by the third-party, nonprofit organization called B-Labs. Although the name is similar to a Benefit Corporation, they are entirely different. | Important considerations include: Certification process typically takes 6-9 months Recertification is required every 3 years Although there are no special governance rules, corporations certified as B-corps must comply with specific B-corp. requirements |
Although charitable organization status comes with benefits such as tax-exemption, it may be a better fit for some ventures to operate as for-profit entities, and leverage a socially conscious entity or certification to showcase their societal commitment. These alternatives offer flexibility and control over the company, while still letting others know that they are committed to furthering a charitably-inclined mission.
If you are interested in organizing a company with a social mission, or for help determining which type of socially conscious entity is best for your needs, please contact Lakshmi Sarma Ramani at LSRamani@outsidegc.com.
Lakshmi Sarma Ramani is a Partner on our Washington D.C.-based team. Lakshmi has over 20 years of significant transactional experience representing a wide range of for-profit and non-profit companies and handles a full range of legal matters, including data privacy and compliance.