A Startup Cheat Sheet for the Baffling World of Company Structures
LLC? C Corp? B Corp? PBC? L3C? The alphabet soup of terminology has created confusion over what corporate forms and certifications are, let alone what one should consider as an entrepreneur. This glossary is the first in a three-part series to help.
B Corporation, B Corp, or Certified B Corp
This is a certification mark, not a legal status, similar to the Good Housekeeping Seal of Approval for business. The team behind the certification is B Lab, which licenses the the mark for between $500 and $50,000 per annum. As of mid-2016, over 90% of B Corps (e.g. Patagonia, Etsy, Revolution Foods) are legally designated as typical Delaware C Corporations or Limited Liability Companies. B Lab, which has the right to audit its licensees, has requirements to ensure that each Certified B Corp has some flavor of mission lock (including conversion to a form of Benefit Corporation; see below for definition).
Benefit Corporation or Benefit Corp
Approximately 30 states have adopted legislation for this “new” legal corporate form (Maryland was the first in 2010), and while many are based on the same model, they differ in legal structure. Benefit Corporations generally have a list of required ESG (Environmental, Social, and Governance; see below for definition) factors that a company must consider in making decisions. Relatedly, Benefit Corporations have disclosure requirements related to ESG (e.g. diversity of company makeup, environmental impact, etc.) and some statutes offer broad enforcement rights that may extend to third-parties — a benefit enforcement proceeding may be brought by the corporation, the shareholders in a derivative suit, directors, 5% owners of a parent entity of the Benefit Corporation, or other enumerated persons granted standing by the articles or bylaws of the Benefit Corporation. One can also convert into and out of traditional corporate forms, like C Corps and LLCs, with requisite shareholder approvals.
Benefit LLC
Certain states (e.g., PA, OR, MD) now recognize Benefit LLCs, as new business structures that specify enumerated ESG factors in their operating agreements. Other states (including CA and DE) permit companies to specify one or more social or environmental goals agreed with investors in the operating agreement and to focus on such goals in addition to generating returns.
CSR, CR, or Corporate Social Responsibility
Simply a term, not an official designation or certification of any kind, adopted by corporations to embrace positive social or environmental goals through philanthropy or cause marketing programs.
ESG or Environmental, Social, and Governance Factors
ESG, as mentioned above, is a term used in the context of a company’s impact and organization. Typically ESG is discussed alongside operations and financial returns, sometimes with legal ramifications. For instance, a financing could be structured with variable terms that adjust if a company meets (or fails to meet) certain established ESG goals or standards.
Hybrid or Tandem
This is a confusing one. Hybrid or Tandems exist when non-profit and for-profit entities work closely together, with three general types:
- Non-profits which own for-profit subsidiaries
- Non-profits which own a percentage of the equity of for-profit entities, and
- For-profits which establish and fund non-profit foundations.
For all three, to work within IRS regulations, management must monitor (and have contracts which govern) flow of funds, resources, services and intellectual property. Governance with independence at the board level to approve relations is also key.
An example of this structure is Kepler, which consists of a for-profit bookstore and a non-profit organization that produces educational workshops and other literary and cultural events. By separating the bookstore from the nonprofit organization, Kepler’s maximizes profitability through two financing vehicles and enables the community to support rich cultural and educational programming through tax-deductible donations and corporate sponsorships. The two organizations, although separate legal entities, collaborate closely to bring people together in support of literacy and community engagement.
L3C or Low Profit Liability Company
Currently in eight states (first introduced in Vermont in 2008), the L3C is a form of Limited Liability Company (pass through tax treatment — meaning the income generated by the entity is only taxed at the individual/equity holdings level and not at the entity level). L3C’s are required to be “mission first” and designed to take PRI’s (Program-Related Investments; see below for definition) from foundations. This is typically viewed as an extension of philanthropy, creating new avenues for capital to traditional non-profits.
MRI or Mission-Related Investment
These are investments made by foundations in for-profit entities for mission-aligned purposes with rules less stringent than PRI rules. The main difference from PRIs is that MRIs do not count toward a foundation’s five-percent requirement (described below) because they are intended to generate revenue as well as accomplish mission. MRIs can limit the activities of the for-profit (although they are less restrictive than PRIs), include reporting requirements and make co-investment with traditional investors more difficult (but not impossible). Note that foundations may use both PRIs and MRIs simultaneously.
PRI or Program-Related Investment
These are investments made by foundations in for-profit entities pursuant to specific IRS rules, which generally require foundations to grant five percent of the value of their net investment assets annually. The main difference from MRIs is that PRIs count toward a foundation’s five-percent requirement. PRIs can significantly limit the activities of the for-profit, include stringent reporting requirements and make co- investment with regular investors much more difficult (but not impossible). Note that foundations may use both PRIs and MRIs simultaneously.
PRI or Principles of Responsible Investment
This is a UN code of conduct adopted by investors, but with no enforcement mechanism.
Public Benefit Corporation (Delaware For-Profit) or PBC
Adopted in Delaware in 2015, the Delaware Public Benefit Corporation is designed for companies aiming to potentially go public and engage in M&A (note:PBCs have filed their intent to go public in the US — including Laureate, Sungevity, and a subsidiary of the White Wave / Danone merged entity). Shareholders and management must commit to a broad public purpose and also agree one or more social or environmental goals which are included in the charter. Management and the board have equal fiduciary duties to such goals as to shareholder profitability. There is minimal reporting (bi-annual), and only to shareholders. Enforcement mechanisms are the same as for traditional corporations — shareholder derivative action, proxies, and removing board members. PBC’s can convert into and out of this form with requisite shareholder approval.
Public Benefit Corporation (California Non-Profit)
And this is where it gets slightly confusing. California, and many other states, designate non-profit entities as Public Benefit Corporations. To be a PBC in California means you’re a non-profit; in Delaware, it means you’re a for-profit.
Social Purpose Corporation (California, Washington, Florida, also variations within Benefit Corporation statutes in Michigan and Colorado)
First adopted as Flexible Purpose Corporations in California in 2011, Social Purpose Corporations are similar in nature to Delaware Public Benefit Corporations in that they are designed to go public and engage in M&A. Shareholders and management must agree one or more social or environmental goals which are included in the charter. Management and the board have equal fiduciary duties to such goals as to shareholder profitability. There are more robust reporting requirement than PBC (DE) — annually and upon material change; and required public reporting. Enforcement mechanism is same as for traditional corporation — shareholder derivative action, proxies, and removing board members. SPC’s can convert into and out of this form with requisite shareholder approval.
SBC or Sustainable Business Corporation
This is simply Hawaii’s version of a Benefit Corporation.
For more, check out Part Two in the series:
