A corporation is a business structure that can be divided into five categories: C corporation, S corporation, nonprofit corporation, close corporation, and B corporation. Typically, C corps are simply referred to as corporations; this type of legal entity can profit, be taxed, and be held legally liable. Although the cost of forming a C corporation is higher than that of creating other structures, this type of entity has a completely independent life. Therefore, it offers the most robust protection to its owners in terms of personal liability.
On the other hand, an S corporation is designed to avoid the double taxation that is typical of C corps. Owners may have some profits and losses passed through their personal income to avoid their S corp being subject to corporate tax rates. In addition, unlike C corporations, S corps may not have over 100 shareholders, all of whom must be US citizens.
As the name suggests, a nonprofit corporation focuses on doing charity, religious, education, literary, or scientific work. Nonprofit corporations, often called 501(c)(3) corporations, benefit the public. For this reason, they may receive tax-exempt status and pay no state or federal income taxes on profits. However, nonprofits must follow very specific rules regarding what they do with any profits they earn; for instance, they may not be used for political campaigns or shared among members.
Close corporations have a less traditional corporate structure, but they resemble B corps in terms of purpose and mission. B corps, another name for benefit corporations, are for-profit corporations that are taxed like C corps but differ in purpose, transparency, and accountability.
A benefit corporation is driven by both profit and mission, and it is a category recognized in most of the US states. Shareholders of a B corp aim to create a public benefit while making a profit, and they hold themselves accountable for that. Therefore, to qualify as a benefit corporation, the company must include a statement of one or more public benefit purposes in its formation documents. Some possible goals are to be environmentally sustainable, serve low-income communities, share profits with charities, or advance public education.
One way that B corps share accountability with the government is through the annual benefits report, a document that some states require. There are several advantages to starting a B corp, for both the owners and the community. Most notably, B corporations encourage social and environmental responsibility, and modern customers view sustainability favorably.
It is possible to convert a for-profit corporation, or C corporation, into a benefit corporation as long as the state recognizes this category. Typically, the owners and board of directors will have to approve this decision. For the conversion, it is necessary to file amended articles of incorporation and pay a fee.
Although there are no additional legal requirements for creating a benefit corporation, there are a number of third-party certification services for B corps interested in demonstrating commitment and pursuing additional value for their business. For example, B Lab is the governing body for B Corporation certification. Certification is primarily based on a corporation’s performance on the B Impact Assessment, which evaluates how the company interacts with its customers, workers, community, and environment.
