Tax Analysts Blog

Benefit Corporations: The Corporate Entity of the Future?

Posted on Oct 29, 2014

Those who shop at Patagonia or Etsy are likely aware of a new type of business entity that is growing in popularity. These companies and a thousand more have chosen to organize as either B corporations or benefit corporations. While there are differences between B corporations and benefit corporations, both are for-profit companies that pledge to work toward some social or environmental goal. The difference being that benefit corporation is a legal status, while B corporate status is conferred by the nonprofit B Lab when corporations have met their certification standards for overall social and environmental performance.

Benefit corporations are very similar to c corporations except for the corporate purpose standard to which benefit corporations are held. Benefit corporations must generate some sort of public benefit and have a positive impact on society or the environment -- as measured by some third-party standard. Benefit corporate directors and officers are held accountable to that public benefit. Shareholders can bring a cause of action for failure to uphold the corporation’s cause.

More than half the states have passed laws allowing companies to incorporate as benefit corporations, -- with Connecticut most recently joining the party.

Still, the number of benefit corporations is relatively small. The reason for this is – ironically – a lack of benefits. Benefit corporations are not given tax, incentive, or procurement preferences by state or federal lawmakers. While nonprofits receive substantial benefits for their chosen entity type, benefit corporations receive no such benefits. They are taxed like c corporations – at least for now.

Benefit corporations are in their infancy. Over time, lawmakers may determine that they are worthy of preferential treatment. But this could be a chicken-and-egg problem. Until incentives are granted, few benefit corporations will be created. But until more benefit corporations are created, the general public and lawmakers will be unable to determine whether preferential treatment is appropriate.

One concern being raised is whether the IRS will encourage benefit corporations over nonprofit organizations to appease the public’s desire for businesses that pursue charitable interests while still generating taxable income. The formation of more benefit corporations could be encouraged by the aggressive denial of tax exemptions to nonprofits or by making the criteria to obtain tax exemptions more strict. However, the IRS is required by law to grant tax exemptions to any candidate that meets the set criteria, so one would hope the Service would stay out of lobbying efforts for or against benefit corporations.

Given the public’s appetite for good corporate citizens and the potential for marketing a business whose purpose is to make a positive impact on society, benefit corporations may grow with or without any tax incentives. If that happens, it will be interesting to see whether the public frowns on tax planning done to increase the amount of money available to benefit a benefit corporation.

Read Comments (2)

David brunoriOct 29, 2014

Cara thanks. I did not know much about b corps. Very enlightening.

robert goulderOct 29, 2014

I'm curious whether the world would be a better place if exempt-orgs were
replaced by B-corps. Why not kick oversight away from IRS and on to
shareholders. Also, would UBIT issues just go away (?) ... since we're
basically taxing them as conventional C-corps.

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