Original Link: https://thegoodaipod.substack.com/p/c-corps-pbcs-b-corps-and-nonprofits
🏢 C-corps, PBCs, B-corps, and Nonprofits: What’s the difference?
And where do DWDG companies fit?
Oct 23, 2020
👋🏽 Welcome to Doing Well by Doing Good, a newsletter and podcast series highlighting the startups aiming to be profitable with a purpose.
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In our last podcast, we explored a new concept: the Public Benefit Corporation or PBC, which is like a Delaware C-corporation, but with a legally-binding social mission.
But how does this differ from nonprofits? Or B-Corps? When it comes to Doing Well by Doing Good, why not just use any one of these constructs? What is the benefit of each and the cons in terms of making an OUTSIZED impact in the Doing Well by Doing Good model?
In this post, we’re going to do a crash course in each one of these and explain some of the key pros and cons. We’ve purposely left out “pass-through” entities like LLC’s and S-corps for this post, since there are a small percentage of high-growth companies structured that way — but we can always come back to them in a later one 😀
First let’s start with the basics. What’s the TLDR;?
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C-corp : the most common of for-profit corporate entity, otherwise known as a “General for profit corporation”
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Nonprofit : an organization not operating primarily to make a profit but instead one whose mission focuses on furthering a social cause or a shared goal and thus are tax-exempt as their profits are typically reinvested to cover operations. The IRS uses the 501(c) description, but there are many types of nonprofits.
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Public Benefit Corporation (PBC) : this is legally a for-profit corporation, but has a moral obligation to take the high road in cases where profit comes in conflict with social impact.
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B-corp : this moniker is NOT a legal definition at all, but rather a certification awarded to a corporation establishing standards for social and environmental performance, accountability and transparency and is designated by the organization B Lab.
Now let’s dive a bit deeper to explore each and their benefits and drawbacks.
C corporations
Let’s start first with the most common of these for-profit entities. Many startups tend to use the standard Delaware Incorporated C-Corp structure , which translates to a for-profit company that is subject to the Delaware law. For the full low-down you can read about it on Investopedia or catch the formal definition, which we’ve copied below from CorpNet. Naturally, most of the Doing Well by Doing Good companies we profile and chat with also tend to be Delaware C corporations [If you’re interested here’s why?].
“The C Corporation is the most common form of corporate entity. Also known as a “General for profit corporation”, the C Corporation is owned by shareholders. The shareholders elect a board of directors to create and direct the high-level policies of the business.
_ This Board of Directors then appoints corporate officers who in turn manage the day-to-day operations of the business._
_ Please note: In most cases, ONE PERSON may act in all capacities. As a corporate formality, and as a good business practice, however, it is important to separate these roles and simply “switch hats” when necessary._
_ Thus, shareholders generally have limited liability, even if they are involved in the day-to-day management while wearing the hat of employee or corporate officer._
_ The shares of a corporation are freely transferable unless limited by agreement of the shareholders. The corporation exists indefinitely, unless and until it is dissolved. It is a separately taxable entity, meaning that it must file its own tax return and pay corporate taxes on its profits. There is no limit on the number of shareholders in a C Corporation.”_
Pros
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Standard structure means a lot of resources are available to help
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Investors are more comfortable with it because of familiarity and previous successes
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Typically attracts the best talent due to the promise of monetary reward
Cons
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Can be overly driven by the need to grow at all costs, even if against the original mission
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Conflicts may arise in the board room if money minded investors conflict with mission driven investors and senior leaders
Nonprofit
501(c) Nonprofits typically are heavily dependent on donations and grants, which often track with markets since they are often a luxury item for many of the donors. That said, there are a few nonprofits which have, for various reasons, shown an ability for high growth, maximizing impact. At their core, nonprofits are created NOT for generating profits for shareholders, but rather are required to reinvest their profits back into the operating business.
Check out the full formal definition of a nonprofit from CorpNet . Naturally there are a number of different types of nonprofits, which you can read more about, but they all have overarching commonalities.
“For those groups that are formed for charitable, educational, religious, literary or scientific purposes, and not for the purpose of generating profits for its shareholders, a special legal entity may be formed under Section 501(c)(3) of the Internal Revenue Code. A fully and properly qualified 501(c)3 nonprofit corporation has the following characteristics:
_ The corporation is exempt from taxation._
_ Tax-exempt corporations are prohibited from paying dividends._
_ Upon dissolution, corporate assets must generally be distributed to another qualified nonprofit group._
_ Significant filing requirements may exist at both the State and Federal level to establish and maintain tax-exempt status._
_ A nonprofit may be prohibited from engaging in certain activities, including participating in political campaigns and substantial engagement in lobbying activities.”_
Pros
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Clear mission drives the daily workings and there is no conflict of intention
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Tax-exempt allows for more of the profits to be reinvested in the business to maximize impact of the organization
Cons
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Not a standard structure for high growth driving away risky investors
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Funding is a luxury expense for donors driven drastically by market conditions
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The best talent may not be attracted to the opportunity due to low monetary rewards
Public Benefit Corporations (PBCs)
Public Benefit Corporations are a fairly new organization type started in 2010 in the US and are organized similar to a C-corp, however with a moral obligation to take the high road in cases where profit comes in conflict with social impact.
As we mentioned in our post on Social Enterprises, the Social Enterprise Alliance is a great source to define this type of social enterprise.
“A public benefit corporation is a legal incorporation available only in certain states that allows organizations to identify a purpose beyond maximizing shareholder value. Becoming a public benefit corporation “protects mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven life post-IPO,” according to benefitcorp.net. Public benefit corporation legislation varies from state to state. To learn more about becoming a public benefit corporation, click here: http://benefitcorp.net/businesses/how-become-benefit-corporation.”
Pros
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Works similar to a Delaware C-corp allowing many of the resources to be just as helpful
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Investors who are interested in making a profit and contributing to a social mission will decide to invest, reducing board level conflicts
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Typically attracts the best talent due to a similar monetary reward as C-corps
Cons
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Investors not attracted to the social mission may be dissuaded due to the possibility of making decisions in conflict with making returns
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Growth could be difficult as later stage investors will focus more on the numbers and have less of an appetite for social impact if in conflict with returns
B corporations
Like we said above, a B corporation is a certification rather than a legal entity. Think of B Corps like the following, companies banding together to come up with a common purpose despite being from different industries. The certification was created by B Lab, a non-profit third party organization created in 2007. The vast majority of these organizations tend to small and medium businesses, so typically not high growth.
We chatted about a similar concept in our first post when we discussed the Pledge 1% movement, which we can think of a microcosm of the same phenomenon that spans both SMB markets and the Fortune 500, and can be made at any point in the company’s journey. B-corporations, similarly, are a certification that can be completed by a business anytime in their journey, after which B Lab will keep tabs on their social impact through the third-party B Lab organization.
Many large Fortune 500 companies, in addition to the Pledge 1% movement tend to use methodologies outside of the B corporation by banding together and making pledges like this one.
Although, in recent years there has been more of a shift and larger companies, including public ones, like Lemonade, who recently went public, have begun to use the B corporation moniker to formalize their positive work. You can see their recent assessment by B Lab here, to better understand how B Lab keeps tabs on organizations.
So what is the the B corporation formally? Well let’s let the B Lab speak for itself:
“Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. B Corps are accelerating a global culture shift to redefine success in business and build a more inclusive and sustainable economy.
_ Society’s most challenging problems cannot be solved by government and nonprofits alone. The B Corp community works toward reduced inequality, lower levels of poverty, a healthier environment, stronger communities, and the creation of more high quality jobs with dignity and purpose. By harnessing the power of business, B Corps use profits and growth as a means to a greater end: positive impact for their employees, communities, and the environment._
_ B Corps form a community of leaders and drive a global movement of people using business as a force for good. The values and aspirations of the B Corp community are embedded in the B Corp Declaration of Interdependence.”_
Like we discussed in our post on Social Enterprise, the Social Enterprise Alliance also extends this to explain how they fit into the construct of “ Social Enterprise ”.
“A B Corp, on the other hand, is an organization that has successfully completed the certification put forth by the nonprofit B Labs. B Corps can only be for-profit organizations, and they must meet B Labs’ standards for social and environmental performance, accountability and transparency. The B Corp certification is a distinction for social responsibility, much like fair trade or organic. Though for-profit social enterprises can apply for B Corp certification, B Corps don’t necessarily have to be social enterprises.”
Pros
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Formalized score assessing standards for social and environmental performance, accountability and transparency completed by a third party non-profit organization
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Ongoing check keeps the company in line their impact goals through public disclosure
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Does not impact the formal structure of the organization in any official capacity, so can be implemented at any time.
Cons
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Not widely adopted amongst the Fortune 500
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Not a formal legal distinction, but rather a certification, so can be temporary and not necessarily tied to profits
How do these fit within Doing Well by Doing Good?
When we think of Doing Well by Doing Good, **we think of a high-growth company which creates a product or service that directly contributes to positive good in the world from Day 1. So how do these different mechanisms play into that? **
The main takeaway is the structure of the company is purely a reflection of the founder’s intention. After all, you could decide to have a C-corp initially and file for a B-corp certification later, or you could start as a PBC but ultimately switch over to a C-corp. The list could go on.
So far, we have found most DWDG companies to be Delaware C corporations and a handful of PBCs.
But there is no one best way to Do Well by Doing Good, and even if there might be one today, it’ll likely change in the future.
High growth businesses need to have an incentive to continue to grow. The common understanding of capitalism is that the incentive of money is enough to drive most businesses, and has been throughout history, but just as humans evolve, so too is capitalism.
_ Our key hypotheses is that the drive to make a difference is more sustainable than a drive to make more money, because money doesn’t have an end. So because DWDG companies are incentivized by their commitment to increase social impact rather than purely profit, they are more sustainable in the long run._
Through our exploration and interviews, we’ll continue to use examples of companies today to extract common themes and share them along the way.
If there’s anything you can take from this post, it’s that high-growth DWDG businesses have many ways of being formed, and if you’re looking to start one, there are a number of approaches to take.
Thanks for reading! While we’ve looked into C-corps and dabbled into PBCs, we’re excited to take more time to explore other for-profit models (and sometimes nonprofit models) which have achieved high-growth. Stay tuned for more 😀
Any ideas for topics you want to hear about? Reply to the email, send us a note @ hello@doingwellbydoinggood.co or tweet us at @dwdgsf. And if you liked this, please share with your friends!
👋🏽 Anand