Benefit Corporations: How Do They Differ from Nonprofits?
The impulse to do good is something innately human and that instinct asserts itself in numerous ways including the formation of certain businesses. Recently, Delaware officially gave a huge stamp of approval to one of these new entities, the benefit corporation, and as home to more than two-thirds of all Fortune 500 companies, Delaware’s approval has effectively made this entity a legitimate option for entrepreneurs and big-time companies alike. But for those who seek to do good through business, this new entity represents a decision, and possibly a difficult one.
In the past, entrepreneurs who wanted to dedicate themselves to a cause really only had one option: the nonprofit corporation. But with the introduction of the benefit corporation, those just starting out have been given the gift of choice. If thinking about forming a business entity filled with good aspirations, below you’ll find a breakdown between these two business structures to help you make the best choice for your new enterprise:
The Basics
If you look at a list of the top 100 nonprofit organizations in the U.S., the first things you’ll notice are the names: Sierra Club, American Cancer Society, Oxfam International, World Wildlife Fund, and many other similar-sounding organizations. From these names, you could get the idea that nonprofits are simply about soliciting donations for charitable causes, and that idea wouldn't necessarily be wrong. But this notion does get more complicated when you consider an organization like The Girl Scouts of the USA, which to most of us is not necessarily known for its teaching of practical life skills to girls, but for its cookies.
Each year, the Girl Scouts sell somewhere in the neighborhood of 200 million boxes of cookies, which totals an annual cookie sales revenue of roughly $780 million. Now, that’s a lot of money, but it’s not strictly profit per se. The Girls Scouts’ mission is to teach girls practical life skills, and in accordance with the IRS rule stating all tax-exempt nonprofits’ business efforts must be “substantially related” to the organization’s mission, the purpose of the cookie sales is to teach girls people skills, goal setting, decision making, and money management (scouts get merit badges for each skill). The cookie revenue serves to fuel community projects and maintain regional arms of the organization. Similarly, many other smaller nonprofit corporations also rely on the sales of products or services to fund their organizations and further their missions, but what separates these non-profit entities from for-profit corporations is how the act of sales directly relates to and furthers the mission of the nonprofit.
Benefit corporations, on the other hand, are for-profit corporations. They operate and follow corporate formalities like any other big business corporation, except benefit corporations have elected to adhere to additional guidelines: issuing annual transparency reports; committing to operate in a responsible and sustainable manner; and staying accountable to shareholders, those materially affected by the corporation’s conduct, and the corporation’s specific benefit purpose. These elections allow benefit corporations to pursue a broader set of objectives than profit alone without worrying about angry shareholders seeking fatter returns on their investment. Like any other business, though, a benefit corporation will fail if it isn’t profitable, and unlike a non-profit corporation whose selling of a product or service may be incidental, a benefit corporation needs a product or service to sell.
Consider Plum Organics, an organic baby food business, as an example. Plum sells organic food and snacks for babies and young children. Aside from using environmentally-friendly packaging and pursuing community projects, by the end of 2013, Plum will have donated more than half a million of their organic food pouches this year to families in need. Part of their corporate purpose, aside from profit, is to help provide healthy meals for starving children throughout America. So even though Plum’s annual bottom line won’t put them as far into the black as a typical for-profit corporation might be with the same business, Plum Organics chooses slimmer margins in order to further their specific benefit purpose. Of course, the directors at Plum Organics and the company’s consumers may well argue that one of the main reasons why the company has done so well (Plum was recently listed as one of America’s Most Promising Companies by Forbes) is because of their benefit purpose, that people are buying because of the company’s structure and broader corporate goals.
Funding
Finding money to start a non-profit can be tricky. Unlike a for-profit corporation, you can’t promise investors a return on their investment, and you can’t plan on future product sales providing a profit. Entrepreneurs starting nonprofits need to ask for the money, which in terms of non-profits is called fundraising. This doesn’t necessarily translate to knocking on doors from the start. You can find funds through various, reliable channels. Think bake sales, benefit events, yard sales, auctions. Corporations, foundations, and government agencies offer various types of grants and funding that you can apply for and use to begin your nonprofit’s programs. Once your non-profit organization is more established, then maybe you can begin to court philanthropists or hire solicitors to bang on doors for donations.
Obtaining financing for a benefit corporation is a much more standardized process. Business loans and outside investors are fairly typical approaches. Future sales can produce returns on investments, and even though your margins may be slimmer, with a benefit corporation you’re in business to make a profit.
Taxes
Although the majority of non-profit organizations in America pay taxes like any other corporate entity, a nonprofit corporation can apply to the IRS for tax-exempt status. For charitable entities, this is known as 501(c)(3) status, which exempts nonprofit corporations from paying federal corporate tax, and in many states, exempts the nonprofit from paying the state’s corporate tax as well. Depending upon the state, many nonprofits can also qualify for sales tax exemptions and property tax exemptions. Professionals can be hired to nonprofits applying for tax-exempt status make it through the paper-filing process.
Benefit corporations do not qualify for any special tax treatment. These corporations pay corporate taxes if they elect to be taxed as a C corp, or they can elect to be taxed as an S corp, in which case the benefit corporation will be taxed as a “pass-through” entity similar to a partnership or an LLC.
Paying Employees
There are often misconceptions surrounding how non-profit corporations pay their employees. It is actually a straightforward process. Employees of nonprofits get paid like any other employee for any other business entity, even if the nonprofit has qualified as a tax-exempt entity. All nonprofits, tax-exempt or not, are allowed to pay employees reasonable salaries via standard W-2 wages. What truly separates nonprofits from other corporate entities is that by definition they aren't conducted for the purpose of making a profit, and at the end of a fiscal year, the nonprofit must show that it hasn't made any money, but it is absolutely allowed to cover all of its costs, employee salaries included.
If a benefit corporation has any employees, a payroll system needs to be set up. New employees must fill out Federal Income Withholding Form W-4. Employees will then be compensated via standard W-2 wages, the same as any other business entity with employees.
Measuring Good
It’s hard to say which entity is capable of doing the most good. Does a nonprofit that provides funding for cancer research do more good than an environmentally friendly company that donates a pair of glasses to someone in need for every pair that is purchased? The answer probably depends on your point of view, or maybe belongs to philosophers entirely.
As far as numbers go, there are way more non-profits than there are benefit corporations, but this is possibly due to the fact that benefit corporations are so new. They were first recognized in Maryland in 2010 and have since been signed into law in 18 other states, Delaware being the most recent. But as to the question of which entity is capable of doing the most good, it will depend on the entrepreneur, their business, and to what structural entity best applies. Hopefully, you can find the best fit for you and your enterprise.
