In the past 5 years, Pennsylvania has added another letter to the discussion on Corporations – the “B” Corporation. Simply put, this was Pennsylvania recognizing an ever-growing trend of entrepreneurs being socially or environmentally responsible.
What is a “Benefit” Corporation and Why do I need to know about it?
Traditionally speaking, corporations are businesses that try to maximize profits for their shareholders. Benefit corporations, on the other hand, are businesses that are organized for profit, with a corporate purpose of creating general public benefit, in addition to any other purposes they have as a business corporation. Simply put, “a benefit corporation offers entrepreneurs and investors the option to build, and invest in, businesses that operate in a socially and environmentally responsible manner.”
For entrepreneurs that want to create a business that not only makes money, but also puts a social issue at its core, the benefit corporation, or B-Corp, may the right entity choice for you.
But what ARE the differenceS between C/S/B-Corp?
There are a few key differences between the three entities and knowing those differences are important when making your decision to incorporate.
C-Corp just means that the corporation was incorporated “normally,” or with no variation from the original and most typical type of corporation. C-Corp is another term for a regular corporation. These are the corporations that can generally be owned by anyone (or other entities), is double taxed (this means that the corporation files a tax return at the end of the year and the shareholders have to report their income when they receive a dividend), and lastly, has a duty to their shareholders.
S-Corp just means that an entity was incorporated under Sub-Chapter S of the Tax-code. (One of those variations from a regular C-Corp) Ownership in an S-Corp is limited to individuals who are U.S. citizens or resident aliens. This means entities cannot own a share of the S-Corp! They are also limited to 100 shareholders, while normal C-Corps can have as many as they want. Lastly, one of the biggest and most notable differences, is the S-Corp’s tax structure. S-Corps have pass-through taxation status. This is just like an LLC or Partnership. The S-Corp will not be taxed as an entity because the shareholders will have to report their percentage of income or losses, regardless if the corporation passed a dividend to the shareholders, on their tax returns. This is a major variance from the regular C-Corp taxing structure. Remember, a C-Corp as an entity is taxed on its profits at the end of its fiscal year and then the Shareholders are taxed after the C-Corp makes a distribution.
B-Corps are another variation from the regular C-Corp; this designation is made at the time of incorporation with the Department of State. When forming the B-Corp, the corporation must designate it as such in the articles of incorporation and check the appropriate box when you fill out the form from the Commonwealth. (A link to the Department’s forms can be found here.) The biggest difference with the B-Corp is that each year, the B-Corp must prepare and distribute to its shareholders an Annual Benefit Report describing its efforts to create public benefit during the preceding year. The report must be filed with the Department of State, which makes it a matter of public record. The biggest benefit, as already stated, is that B-Corps are allowed, in fact required, to carry on primarily for its stakeholders. The difference between a stakeholder and shareholder is everything. A shareholder is a stakeholder but a stakeholder may not be a shareholder. In other words, included in the term “stakeholder” are employees and creditors in addition to shareholders. So this means that the Board of Directors for the B-Corp can make a decision which would benefit the employees of company instead of making a larger profit for the shareholders.
Since the pivotal case of Dodge v. Ford Motor Company in 1919, Courts have agreed that the primary purpose of a C-Corp is to carry on for it’s shareholders. In this case, the Dodge brothers were shareholders of the Ford Motor Company. Ford, being truly ahead of his time, decided he would distribute less in profits to his shareholders in order to redistribute more money into the business. Ford also lowered the price of his trucks from 900 dollars to around 380 dollars. This of course cut-into long term profits and dividends, but also allowed more people to be able to afford the luxury vehicle. Ultimately, the Court decided that Ford had to distribute a larger dividend to his shareholders because that is what C-Corps are all about. If only B-Corps would have been a thing in 1919!
B-Corps aren’t for everyone! But, they may be for you if you are a social entrepreneur looking to create profit in your idea while also bringing about social or environmental responsibility. One must be mindful of the differences between each of the many different types of business entities and the different taxing structures which follow. Because of this, always make sure you contact an attorney before making any decisions regarding your future business. Checking with an attorney today could save you a lot of money and headache tomorrow!
*This post was checked for currency on September 29, 2018 and reproduced with permission by author Christopher Harris. Original post can be found here.
Christopher Harris is a 2018 graduate of Penn State’s Dickinson Law. He is originally from Maud, TX and graduated from Southern Arkansas University with his Bachelor’s degree in History. He is now an Associate at Stock and Leader, LLP in York, PA, where he counsels school administrators on legal and policy matters as well as advises officials on school law trends.