What are S Corps, C Corps and B Corps? I asked myself this when reading a blog on the Stanford Social Innovation Review webpage. Eric Friedenwald-Fishman talks about his experience as an entrepreneur, sitting down with his lawyer and business partners to choose a corporate structure. They were deciding between S Corp and C Corp, but he wondered why it really mattered?
Small business owners evaluate and weigh the benefits and costs of forming either an S corp or C corp. The C corp is more standard as it allows for separate taxable entities, meaning taxes are first paid at the corporate level and then at the individual level. There are also no ownership restrictions. The S corp is a bit different because it has pass-through tax entities, which means the profits or losses incurred by the company are passed through the business and reported on the owners’ personal tax returns. It also requires that there can be no more than one hundred shareholders and they must be US citizens. S corp comes with special tax privileges, however, C corp is better for a small business that is expecting to grow or expand because it offers greater flexibility.
The introduction of B corp as a possibility for small businesses is relatively new. The first state to adopt benefit corporation laws was Maryland in April 2010 and since then, six other states have joined and four states have pending legislation. The idea behind B corp is that businesses are powerful and they should use their power and control to solve social and environmental problems. The responsibility of companies is to maximize shareholder returns and this is done by minimizing the consideration for employees, the environment and communities. B corp legislation seeks to change the structure of businesses and give them the opportunity to help society and the economy.
Like S corp and C corp, B corp has some requirements. The first requirement of B corp is purpose. Businesses should have a positive material impact on society. The second requirement is accountability. B corp businesses should consider financial implications as well as non-financial implications when making decisions. Lastly, B corp businesses must give fair returns to shareholders and allow for open disclosure and transparency. Supporters believe these requirements will promote a healthier workforce and community, create more stability in the community and create an avenue for long-term competition.
The logical question for businesses is to ask why choose to form a B corp rather than S corp or C corp if it just has more requirements. There are numerous benefits to becoming a B corp and one highlight is differentiating your brand. Labeling your business as a B corp creates a better reputation among consumers and the public. B corp is a new concept, so the media has been giving B corp businesses more attention. There are also service partnerships available to B corp businesses such as discounts on service sites like Salesforce.com, which can help small businesses save money. This new structure for business is also receiving increased interest from investors. With this in mind, do you think B corp legislation will pass in all 50 states? Currently, there are approximately 500 businesses with B corp certification. Will more businesses see this as an advantageous structure for their company?