Vail Daily column: Becoming a B
To Shakespeare we owe, “To be or not to be.” Good question. Stated more modernly, we might ask, “How do you become a B?”
We are all familiar with corporations. As a rule of thumb, publicly traded corporations are “S” corps, the “S” standing for an Internal Revenue Code section “S” and the “corp” of course being a truncation of the word corporation. Most “mom and pop” corporations are generally “C” corps, again deriving from the Internal Revenue Code section from which they spring.
For those of you in the know, there is a whole alphabet soup of related entities which — along with corporations — are collectively known as “entities of limited liability” because they, ah, limit liability. More on that in just a sec. The “other” entities include limited liability companies (LLCs), limited partnerships (LPs), limited liability limited partnerships (LLLPs), limited liability family partnerships (LLFPs) and a host of others.
As said before, what all these entity times have in common is that their liability is limited. This does not mean that they have no liability. What it means instead is that what is known as their “vicarious” liability is limited.
A few definitions might help.
First “liability” means that one is legally responsible for something. Say I bump your Honda Accord when you are stopped at a light. If I am found legally responsible for your dented fender, then I can be said to be “liable” for it. “Vicarious,” Webster’s tells us, is “serving instead of someone or something else serving instead of someone or something else.” OK, that’s a little obtuse. Let me put it in more concrete form; when you leap up from your couch, a cold one in your hand, and let out an “alright!” when the Broncos score, you are experiencing the “vicarious” thrill of D.T. hurtling into the end zone.
Black’s law Dictionary embellishes “vicarious” within the legal context. “Vicarious” liability is defined as “indirect legal responsibility.” For example, an employer may not be held liable for the wrongful acts of an employee or an agent. What else is nice about limited liability is it helps you hang on to your treasure. As the entity is a legal “being” separate from the persons running it, if say a corporation is sued, most times any potential award is limited to the assets of the company rather, say, than the “mom and pop” who own it. If there was any doubt about that before, presumably Citizens United at least tangentially settled it.
Both C corps and S corps are “for profit.” The express goal is to make money and pay it out in profit to the owners. But what about nonprofit corporations? Don’t they make money too? Well, yes, of course. As the ice bucket challenge recently showed, not-for-profit corporations can rake in some serious scratch. The distinction is, however, that a not-for-profit corporation must not pay out profits; what is left after salaries, overhead and operating expenses must be put back into the nonprofit mission. In the case of the ice bucket challenge, for example, all those millions will laudably go toward Amyotrophic lateral sclerosis (ALS) research.
The main virtue of nonprofit corporations, besides the good work that they do and the same limits of liability they enjoy, is that, if you support one, then your donations are tax deductible.
What may surprise you is that there are all kinds of nonprofits, all of which are addressed in Section 501(c) of the Internal Revenue Code. There are “social clubs” (Section 501(c)(7)), fraternal societies (501(c)(8) & (10)), veterans organizations (501(c)(19) & (23), employee benefit associations (501(c)(4),(9) & (17)) and more. What most of us think of, however, when we think of a “nonprofit’ is a 501(c)(3) corporation, one in some way involved in religion, science, education or charity.
There is, however, a new kid on the block. Think of it, as you will, as a mule. Yes, the kind that brays. A mule, you may know, is the offspring of a male donkey (or jack) and a female horse (mare) — what you may not know is George Washington is considered (at least metaphorically) the “father” not only of our nation, but also the American mule … but I diverge. Anyway … B corporations are sort of like mules — in the same way that a mule is not quite a donkey and not quite a horse, a B corp is not quite a for-profit corporation and not quite a non-profit. Instead, it is an interbred mix, a sort chimera if you will.
The “B,” by the way, does not stand for the Internal Revenue Code from which it derives. Instead, the “B” in this case is for “Benefit.”
A benefit corporation or B corp is a corporate form available in certain U.S. states (including Colorado since 2013), designed for for-profit entities that wish to consider society and the environment in addition to profit in their decision making process. B corps differ from traditional corporations in regard to their purpose, accountability and transparency. The purpose of a benefit corporation includes creating general public benefit, which is defined as “a material positive impact on society and the environment.” A benefit corporation’s directors operate the business with the same authority as in a traditional corporation but — whereas in a traditional corporation, shareholders with proper standing judge the company’s financial performance — in a B corp they judge qualitative performance based on the benefit corporation’s stated goals. Think of them as do-gooder for-profit corporations.
Shareholders in a benefit corporation determine if the corporation has achieved a material positive impact. If a dispute occurs, then it is up to the courts to determine if the benefit corporation did achieve a material positive impact. Additionally, through the issuance of an annual benefit report to the public, consumers are provided information to determine if they agree or disagree with the benefit corporation’s methods of achieving a material positive impact upon society or the environment. (Or, if it so decides, upon specific goals of generally societal benefit.)
The additional accountability provisions found in a benefit corporation require the director and officers to consider the impact of their decisions not only on shareholders but also on society and the environment. Benefit corporations also provide shareholders with a private right of action, called a “benefit enforcement proceeding,” that they can use to enforce the company’s mission when the business has failed to pursue or create general public benefit.
Benefit corporations are for-profit entities and do not offer philanthropists the same tax advantages as donating to a nonprofit organization. B corps simply expand the range of opportunities for individuals or institutions to use their investment capital — not just their philanthropic dollars — to create a positive impact on society and the environment. B corps are an adjunct to traditional 501(c)(3)s; while they are obliged by their charters to effect some social good, they are intended, too, to make a buck. Still to be a B can be good for “we and me and thee.”
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddision, Tharp and Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody, divorce and civil litigation. Robbins may be reached at 970-926-4461 or at either of his email addresses, email@example.com or firstname.lastname@example.org.
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