Investors, stockholders, and entrepreneurs increasingly consider social and environmental issues in forming and operating companies. As a result, hybrid for-profit/nonprofit business models are on the rise. In particular, so-called B (“beneficial”) corporations appear to be growing in number. Further, a new, quasi-charitable form of limited liability company, the L3C, has been adopted in five states and is under consideration in several more. B corporations and L3Cs are distinct concepts, but they generally share a common purpose of fulfilling a larger community benefit through the power of a normal for-profit business.
B Corps: Growing In Number
B corporations are for-profit business organizations that have been certified by B Labs, a Pennsylvania-based nonprofit organization, as serving social and environmental purposes along with generating profits and shareholder value. Put another way, a B corporation responds to the demands of stakeholders, not just shareholders, and stakeholders include employees, vendors, and the community at large as well as shareholders. The phrase “doing well by doing good” is overused these days, but in the case of B corporations, it probably fits.
To earn B corporation status, a business organization must achieve and maintain a score of 80 out of 200 possible points on a scale developed by B Labs. Scoring is based upon numerous factors such as facilitating employee ownership, providing retirement and health plans, encouraging sustainability and other environmentally-friendly practices, and serving the community. B Labs monitors and audits its B corporations to ensure that they continue to meet the requirements for certification. Further, as you might suspect, in order to be certified, a B corporation must pay B Labs a yearly licensing fee calculated on the basis of the corporation’s annual sales. Currently, the licensing fee ranges from a low of $500 for companies with less than $2M in annual sales to a high of $25,000 for companies with $100M or more in annual sales.
Not everyone agrees with B Labs’ scoring system, but there is little doubt that many of the questions raised by B Labs’ scoring process should be considered by most businesses. In addition to achieving a sufficient score, a business organization may need to amend its charter and other organizational documents to become a certified B corporation.
B corporations generally do not have any special legal status. Rather, B corporation certification is more akin to a good business seal of approval. Furthermore, despite their name, B corporations are not confined to traditional corporations formed under state law. Limited liability companies and partnerships (which are not corporations under state law but areoften used for businesses) may qualify as B corporations as well.
Depending upon your company’s profile and business practices, B corporation status may be a way for your company to differentiate itself in the marketplace. Today's consumers tend to consider corporate social responsibility along with service and price when making purchasing decisions. In addition, sophisticated investors often take into account the social and environmental impact of the companies in which they invest. B corporation status thus could make your company more attractive to both customers and investors. Finally, in rare cases, tax credits may be available to B corporations in certain jurisdictions (e.g., Philadelphia, Pennsylvania).
L3Cs: Uncertainty Hinders Growth
Over the past two years, five states have enacted laws creating low-profit limited liability companies or “L3Cs.” Several more states are considering L3C legislation. Fundamentally, an L3C is a cross between a nonprofit and for-profit. It is not tax-exempt, but rather is a new form of taxable business enterprise that is designed to further a charitable or educational mission. In addition, under the right circumstances, L3Cs may facilitate program-related investments. Program-related investments are a special category of investments made by tax-exempt private foundations that, in addition to earning a profit, further the mission of the investing foundation.
Because L3Cs are merely a variant of limited liability companies (“LLCs”), and because LLCs are authorized to conduct business in all fifty states, L3Cs may be poised to become the business entity of choice for social enterprise and other mixed for-profit/non-profit ventures throughout the United States. This is especially true for businesses that seek capital in the form of program-related investments.
On the other hand, critics of the L3C have correctly pointed out that, because the IRS has not preapproved L3Cs for program-related investments, the L3C currently has no real advantage over a traditional LLC. Despite this valid criticism, though, there may be other advantageous uses for L3Cs that do not involve program-related investments. For example, an L3C might be useful as a wholly-owned subsidiary of a tax-exempt organization. Alternatively, an L3C might be well-suited for certain partially charitable structures such as hospital-physician joint ventures. Neither the critics nor the supporters of the L3C have had time to fully explore these alternative uses.
In summary, due to the surrounding uncertainty, L3Cs have yet to garner broad acceptance and support. If, however, IRS approval is obtained, L3Cs may become the entity of choice for many hybrid for-profit/charitable endeavors.
One final interesting point about the L3C: Since it is fundamentally a limited liability company, an L3C should be able to qualify as a B corporation.
If you have questions about B corporations or L3Cs, please contact partner Cass Brewer, the author.