The Difference Between B-Corp, Benefit Corp, L3C, and PBC

When you're creating a company or organization, and you want to promote your ethical stances in the overall world of commerce, you have a lot of options.

For example, you can pursue Fair Trade certification. Fair Trade is a world-recognized and high-standard framework for ethical production, but it's also very limited in that it only works at the base supplier level (and trickles up to companies that exclusively use fair trade sources.) We've written about the process before.

If you can't qualify for Fair Trade, there are a host of other options. Four that you'll commonly see tossed around are B Corps, Benefit Corps, L3Cs, and PBCs. What are all of these, and how do they vary? Let's talk about them and which one may be right for you.

What is a B Corp?

B Corp is a designation created by the nonprofit organization B Lab. It was designed, among other things, as an alternative to Fair Trade, and as something that can be more widely used for businesses and vendors who aren't able to build entirely off of Fair Trade sources.

Unlike something like Fair Trade, B Corp is a certification a business can achieve that reviews its holistic position in the world of environmental and social justice.

In order to qualify for B Corp certification, a business must:

• Demonstrate a high level of performance across social and environmental spheres. This is estimated through the B Lab's B Impact Assessment, where a company must score at least 80 or above.
• Commit on a legal level to, if necessary, changing corporate governance to add and enforce accountability to all stakeholders (not just shareholders) for external validation.
• Exhibit and enhance transparency by allowing their information and performance to be benchmarked and published by B Lab.

The actual process to become a B Corp can vary depending on the size and scale of a business, with higher standards and more rigorous auditing for larger companies. It's a personalized and variable assessment performed by B Lab auditors and requires a look at a lot of paperwork, proof, and more. It can even take into account public complaints and opinions and can involve site visits throughout your organization.

B Corps focuses on social justice and environmental performance and promotes a handful of benefits to companies that certify, including listing on their directory, a positive relationship and association with people who are aware of B Corp status and requirements, and a more positive impact on environmental and social issues.

What is a (Public) Benefit Corp?

B Corp status is granted by a third-party nonprofit organization. What about Benefit Corps and Public Benefit Corps?

While you might think the B in B Corp stands for Benefit, it doesn't actually stand for anything. Unfortunately, this adds to the confusion; many resources, including law firms and even Cornell, claim that Benefit Corps and Public Benefit Corps are also often known as B Corps. While this is true in that people mix them up all the time, they're different things entirely.

Benefit Corps and Public Benefit Corps are the same thing, so we'll refer to them more as PBCs to avoid the confusion between Benefit Corp and B Corp.

PBCs are just like normal corporations, which are typically known as C Corps. They are incorporated with a state as normal. The difference is the added status of Public Benefit to the corporate governance.

A traditional C Corporation exists primarily with a fiduciary duty to its shareholders, to increase their profits primarily. Public Benefit Corps, instead, add in an additional duty to stakeholders that include everyone from employees to customers to the people impacted by the manufacturing and transportation of their products.

More importantly, a Public Benefit Corp is founded with an additional statement of purpose in the formation documents for the company. That statement of purpose promotes a benefit to the public in some way.

Typically, a Public Benefit Corp will undergo additional assessments and auditing to validate their public good.

In a sense, you can think of a PBC as an additional layer on top of a traditional corporate foundation. It's not managed by a third party the way B Corps are managed by B Lab; instead, they are generally validated by the state's Secretary of State or Chamber of Commerce for the state where the company is incorporated.

Unfortunately, all of this varies from state to state. To add to the confusion, consider:

• Some states, like Delaware, have formalized the process of registering as a Public Benefit Corporation, and make it both easier and more accurately measured than the average across the country.
• Many states don't have formal processes, but have the ability for a company to register as a Benefit Corporation.
• Some states, like California and New York, use Public Benefit Corporation as a term to refer to nonprofit entities registered for the public good instead. As if things weren't confusing enough!

Normally – other than in cases like California and New York – PBCs are not nonprofits. They're for-profit companies that simply add some kind of ethical or social benefit to their goals and overall structure. Well-known companies like Patagonia and Ben & Jerry's are registered PBCs.

Note: Another source of confusion is the fact that if you want to apply with B Lab to register your company as a B Corp, one of the ways to qualify is to register as a Public Benefit Corp. This means that many B Corps are also PBCs, but not all PBCs are B Corps.

Can things get any more confusing? Well, let's look at the third classification on our list, L3Cs.

What is an L3C?

L3Cs are one of many kinds of hybrid entities similar to B Corps and PBCs, in that they combine the goals of both for-profit and nonprofit organizations. However, L3Cs differ from PBCs in one key way, which is actually likely familiar to anyone who knows about business organization and corporate structures.

If a Public Benefit Corporation is the ethical and moral version of a Corporation, an L3C is the ethical and moral version of an LLC. L3C stands for Low-profit Limited Liability Company.

L3Cs function almost identically to LLCs. They are still taxed the same way, they are unable to accept tax-deductible donations and contributions, and they still pay their profits out to their owners.

So, what's the main difference?

L3Cs are a structure the IRS allows for an LLC to be able to accept a specific kind of financing called Program Related Investments, or PRIs. PRIs are investments made by Foundations, which are their own kind of legal entity. Foundations are required to give away some 5% of their assets each year, minimum, in order to keep their status as tax-exempt entities. L3Cs are a specific structure that allows an LLC to receive these donations, whereas a traditional LLC cannot accept them.

There are a couple of drawbacks to L3Cs. First of all, they don't exist in every state. They're a state-level structure governed by state-level tax services, so if you want to form an L3C, you need to form it in a state that allows L3Cs to be formed. If that's not your state, you need to found your company in a different state and register it as a foreign entity in your state of operation. This isn't exactly hard or uncommon – Delaware gets a million of these every day – but it's a bit more of a hassle than your typical LLC registration.

Ongoing Changes and Confusion

One of the biggest issues when writing a guide like this is that everything we've written so far is subject to change.

B Lab, for example, uses holistic measures to evaluate its applicants. These holistic measures are an evaluation of the company, the company's position in social and environmental systems, and the potential impact (positive or negative) it can have. The bar varies depending on the company, and some firms will have much more rigorous demands to be met if they want to meet and maintain B Corp status.

That's not all, though. PBC and L3C status varies from state to state. The standards required to meet PBC status may be as simple as filing the right paperwork and making ethical behavior part of your overall goals, even if there's not much you can do besides avoid the worst suppliers for your products.

Not all states offer PBC options, and those that do may have different configurations and regulations for them. Similarly, not all states allow the registration of L3Cs, though at least the only real difference between an LLC and an L3C is the finding quirk, so there isn't a ton of variance.

The other issue is that the entire situation is constantly changing from two different pressures.

The first pressure is social change and progress. Some elements of society push for more aggressive changes and a greater emphasis on ethics, morals, sustainability, governance, and environmentalism. On the other side, some elements prefer more corporate-focused, profit-motivated actions, and are willing to sacrifice the ethical treatment of employees and the sustainability of the environment in pursuit.

All of these perspectives also change over time. What might have been incredibly progressive a few years or a decade ago is now commonplace, and what we view as progressive today would have been unheard of in the past. A company in the position to be a forward-thinking and socially conscious entity now might be middle of the pack or lagging behind in a few years. You have to constantly move forward and commit to the cutting edge of ESG initiatives to keep up.

The second pressure is the government. In the same way, different states have different standards, different administrations for those different states have different standards, and it's not uncommon for the rules to change every couple of years. It can be tricky to keep up with all of this information, and we aren't even going to try here in a post we're aiming to be evergreen. You'll need to look up the specific rules and atmosphere for the area you want to register your company to be sure you make the best decision.

Which Kind of Corp is Best For You?

With all of these options, what is the best?

Truthfully, there's no right answer here.

If you're already going to form an LLC but want to be able to accept Foundation funding and focus more on ESG initiatives, forming an L3C might be a good idea. On the other hand, if you don't think there's much of any chance you'll actually receive that funding, there isn't much reason to go out of your way to create an L3C over an LLC, especially if you have to register out of state to do it.

Similarly, forming a PBC has specific implications depending on the state in which you're founding your company. This one is a little more of an important distinction because the difference in fiduciary duty can be important if there are ever legal challenges to the way you administrate your company. Moreover, if you're in a state where a PBC is a nonprofit, that's another discussion entirely.

Registering yourself as a B Corp is a separate issue entirely, and you don't need to be a L3C or PBC to do it, though it can certainly help.

There's also the DIY option. You don't need any of these designations or documentation to be an ethical participant in the marketplace. The main reason to formalize yourself with one of these designations is for the few funding and tax benefits like L3Cs get, and to use them as marketing efforts to officially push your ESG positions. If you don't need the official backing, or you want to promote your own way of doing things, you don't need any of these designations.

On top of that, you can also form more than one entity. It's not uncommon for a standard corporation to form an L3C or other spin-off entity to manage the charity and ESG work backed by the main company but legally separate.

There are many such options to pursue, and it's entirely possible that they aren't right for you. All we can say is that you should always strive to do better, whatever "doing better" means in your situation.