We have seen a large increase in the number of people entering business with a larger purpose in mind than simply making profits. Traditionally, social entrepreneurs have pursued non-profit status—especially 501(c)(3) designation—to fulfill this aim. As we’ve seen the Millennial generation rise to leadership positions in business, either as corporate executives or startup entrepreneurs, we’ve seen another trend develop with the embrace of a more purpose-driven for-profit model, the B Corp.
If you’re thinking of your business fulfilling some sort of elevated mission, you should know the differences between a B Corp and a non-profit corporation. First, let’s look at non-profits.
Non-profit organizations looking to achieve 501(c)(3) designation with the Internal Revenue Service (what we see most commonly at the Forrest Firm) need to have a specific purpose for benefiting the public. It’s best to define these acceptable purposes for receiving tax-exempt donations by using the language directly provided by the IRS itself:
“The exempt purposes set forth in Internal Revenue Code section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public building
s, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
Here in North Carolina, if you want to form a non-profit organization, it will need to be a corporation. Some states recognize other non-profit entities, such as a non-profit limited liability company, but here in North Carolina only a corporation can be a non-profit entity. The first step in forming a non-profit corporation in North Carolina is forming your legal entity, which is a process that is governed by state law. You can achieve corporate formation of a non-profit in North Carolina by filing Articles of Incorporation with the office of the North Carolina Secretary of State. Along with Articles of Incorporation, it’s recommended that you create other supporting corporate records, such as bylaws and written consent actions, which we recommend be drafted by an attorney. Some important decisions that need to be made when preparing the formation documents include selecting a board of directors, deciding on a North Carolina address that would function as the company’s headquarters (if applicable), and, to state the obvious, picking a name for the entity.
A common, albeit not required, second step in forming a non-profit corporation is applying for tax-exempt status, which is governed by federal law and regulations put in place by the Internal Revenue Service. Tax-exempt status is important become it allows non-profit corporations to receive tax-deductible contributions while also being exempt from many forms of taxes (most importantly, income). For most organizations seeking tax exemption, the proper method is completing a Form 1023.
To qualify as a 501(c)(3) organization, which is the most common exemption we handle, the organization must be organized and operated exclusively for an exempt purposes (listed in the IRS language above) and not for the benefit of private interests (e.g., earnings may not be distributed to a shareholder or specific individual). 501(c)(3) organizations are also restricted on how much they can participate in lobbying activities.
Form 1023 is fact-intensive, requiring descriptions of the organization’s operations and adherence to its stated purpose. There is an application fee of $850 for organizations whose actual or anticipated gross receipts exceed a four-year average of $10,000. If the actual or anticipated gross receipts are less than $10,000 over the applicable four-year period, the application fee is $400.
Individuals forming non-profits are often surprised by the length of time it takes the IRS to review a tax-exempt application. Approval times vary widely, but it will probably take a few months or even a year before the IRS grants tax-exempt status. However, in 2014, the IRS created Form 1023-EZ, which is a streamlined application (i.e., easier to complete and quicker turn-around time for the IRS) for 501(c)(3) organizations that have assets of $250,000 or less and annual gross receipts (actual or expected) of $50,000 or less. The application fee for an organization that qualifies for Form 1023-EZ is $400 (even if it exceeds the $10,000 threshold referenced above).
Benefit corporations, more commonly known as B Corps, operate for profit, but also for social and environmental benefits. Some states recognize a formal entity type known as a public benefit corporation, but here in North Carolina a B Corp is not a separate state recognized entity type. To be a B Corp in North Carolina means to be certified by B Lab, a non-profit organization dedicated to using the power of business to solve social and environmental problems. Certified B Corps meet and maintain rigorous standards for social and environmental performance, employee satisfaction, accountability, and transparency.
The Forrest Firm itself achieved certified B Corp status early in 2016, making us North Carolina’s largest law firm to operate this way. To reach this designation, we worked through a months-long process with B Lab, where the organization conducted an initial assessment of our business and evaluated multiple aspects of the company to convey final certification. B Lab reviewed the Forrest Firm’s practices, policies, and operating procedures in a variety of areas, including sustainability, social and environmental responsibility, hiring practices, work-place environment, compensation and benefits structure, as well as its work and volunteerism with the community. This certification is reviewed and renewed every two years and certified B corps may be randomly audited.
Continuing to use the Forrest Firm example, we are organized with the NC Secretary of State as a Professional Corporation, a common entity distinction among professional firms. To transition to a B Corp, there were no actual changes to our designation with the State of North Carolina; however, the firm committed to multiple revisions of our supporting corporate documents, including our corporate bylaws. When businesses apply for B Corp status, one of the requirements for certification is to have clearly stated in your bylaws the ways in which you intend to benefit different constituencies, specifically your employees and the communities you serve. In our case, our founder, James Forrest, stated and implemented a host of changes to the bylaws that reflected ideals for more sustainable working environments and benefits for our attorneys, as well as an aggressive set of volunteer and pro bono policies intended to benefit the communities where our attorneys operate.
The benefits of becoming a tax-exempt non-profit are obvious – the coveted tax exemption and deductibility of contributions that 501(c)(3) status affords. What are the benefits of operating as a B Corp?
First, if you believe that business can be a force for good and you want to operate with that purpose in mind without subjecting your business to the exhaustive regulations that come along with tax exemption or limiting your capital raising or exit opportunities, then the B Corp route could be right for you.
In our own experience and in hearing testimonies from our B Corp clients and folks in our network who are committed to this model, the B Corp designation can make your business more attractive from a sales and marketing standpoint, as many purchasers of products and services are looking to buy from companies that are committed to environmentally-friendly policies, diversity in hiring practices, and a long-term view based on triple bottom line-thinking.
B Corps are becoming more and more attractive from an investment standpoint as well. There are many venture capital companies and funds, as well as angel investors, that are dedicated to capitalizing mission-driven businesses. The B Corp certification—and ongoing review from B Lab—ensures they are placing their funds with companies who are not only committed on benefitting the public from multiple fronts, but also doing so consistently.
At the Forrest Firm, we routinely consult with entrepreneurs and executives looking to position their companies for success and do so as a reflection of their own values. We enjoy sharing our own B Corp experience, as well as our vast knowledge of counseling many non-profits for every charitable purpose, from fighting hunger and disease to faith-based organizations. Contact us today to receive the consultation you need to drive your purpose-driven business forward.