For many of us, it has been a defining year in the existence of our country. Social justice, environmental consciousness and helping others whose lives have been negatively impacted by the pandemic have been of paramount concern to all of us, along with the health of our families, friends and colleagues.
These concerns have led to a renewed and broader focus by businesses. Since the corporate failures at the beginning of the 21st century and calls for businesses to operate responsibly toward all stakeholders and contribute to solving global issues, more businesses have become focused upon benefitting all of their stakeholders, including their employees and communities, as well as, their shareholders. This refocusing has only broadened due to the pandemic and renewed and broadened concerns over social justice and the environment. Within this context the concept of the “B-corporation” has been coming up in more and more conversations regarding the future of philanthropy. Although the B-corporation has been a concept for years, it has been severely underutilized.
Recently, one of our clients had a vision; to help young women who have less access and are generally victimized in the music industry. To accomplish this, she wanted to create a model that was sustainable and made it known that they were going to make a lasting difference in the world. Typically, people form a not-for-profit to make that known, but could a corporate investor model could work the same way? By combining the best attributes of the not-for-profit and for- profit worlds, could you have more of an impact? Can a not for profit also come into play in this structure?
This organization, Nvak Collective, (Nvak), is a Public Benefit Corporation and the first B-corporation music label. This is not only groundbreaking, it’s a model we are likely going to see adopted more and more. Nvak’s model incorporates elements such as how they hire, how they treat employees, vendors, customers, and other stakeholders and how they not only fulfill the business mission, but also how they further society on issues such as women and LGBTQ+ community rights. Check out our Civic Warriors Podcast on Nvak here.
What is a B-corp?
B-corporations are, often, referred to as “for-profit not-for-profits”. In essence, a public cause or mission is being somewhat transparently fulfilled which is similar to the public aspects of US a US charity’s formation, exemption, information reporting and solicitation registration and renewal. B-Corporations are governed by state laws and regulations and not all states have adopted this as an entity type. In 2010 Maryland was the first state to adopt the B-corporation. New York enacted its Benefit Corporation Law in 2012. Currently B-corporations have been adopted or exist in the form of pending legislation in more than 40 states. A constant among the states is that form a B- corporation formation requires the B-corporation to have a mission statement and incorporate the mission in how it does business. There is, also, an independent external B-corporation certification body, B Lab. See here for more details.
How are they treated for US income tax purposes?
They are treated as C-corporations for US income tax purposes.
What are the benefits of being a B-Corp?
By holding yourself to a higher standard, you are setting the bar to operate a socially responsible business. This can be attractive to investors, employees, customers, vendors and others that the business interacts with. Most importantly though, operating as a B-corporation helps society become more inclusive as well as provides more opportunities for those that would not otherwise have them.
Are there any requirements or other issues with a B-corp?
Reporting is an area that has deterred some entrepreneurs and businesses from using this model. B Corporations are required to file an annual benefit report disclosing information related to the performance with respect to its specific and general benefits, measured against a third-party standard. This may seem burdensome, however, organizations should view this as an opportunity to report on the great work they have been doing. This is somewhat similar to filing an organization’s Form 990, Return of Organization Exempt From Income Tax and telling an organization’s story and highlighting its accomplishments.
Where do I start?
Start the conversation with your attorney and your accountant. There are legal and tax considerations when structuring these entity types. Additionally, the vision is important in understanding how to properly set up the entity structure.
Contact our Withum’s Team Members to help address your further questions.