What’s the Difference Between a C Corporation and a B Corporation?

The primary difference between a C Corporation and a B Corporation is that a C Corporation primarily operates to generate profits for its shareholders, and a B Corporation, with the “B” being short for “Benefit,” strives to be socially responsible and to benefit its stakeholders, which can include employees, suppliers, and others, in addition to shareholders.

Both are for-profit businesses, although B Corporations contain some qualities of nonprofits, such as working toward a mission and providing public benefit. It’s important to understand the distinction between a Benefit Corporation and a Certified B Corp, and you’ll learn more about that later in this article. A Benefit Corporation does not need to be certified, but there can be advantages in doing so.

In this article, I’ll explain what’s different about C Corporations and B Corporations. I’ll also fill you in on Certified B Corps and we’ll discuss some of the advantages and disadvantages of both types of businesses.

Where C Corporations and B Corporations Differ

Shareholders vs. Stakeholders

As you’ve just read, the biggest difference between a C Corporation and a B Corporation is that a C Corporation operates with a goal of benefiting its shareholders, while a B Corporation operates primarily for its stakeholders.

To understand that distinction, consider this. A shareholder is always a stakeholder in a business, but a stakeholder may or may not be a shareholder. A stakeholder can be someone who delivers goods to a company, the child of an employee, or a foreign worker who produces the products the company sells. For B Corporations, the environment is often considered a stakeholder. Anyone or anything who benefits from the company’s profits is a stakeholder.

Unlike members of the board of directors of a C Corporation, who are charged with making decisions to maximize the value the Corporation’s shares, directors of a B Corporation can make decisions that benefit company employees, suppliers, or other stakeholders.

Annual Report Requirements

Another difference is that while nearly every state requires a Corporation to file an Annual Report providing a detailed overview of its operations and financial performance, B Corporations in some states are required to file an Annual Benefits Report. That report typically highlights the company’s social and environmental efforts and outlines initiatives pertaining to corporate social responsibility. Some B Corporations file Annual Benefits Report to inform potential investors of their achievements even if the report is not legally required.

Common Elements of C Corporations and B Corporations

Because they are both Corporations and governed by rules that apply to that type of business entity, C Corporations and B Corporations have a number of things in common, including the following:

Formation

C Corporations and B Corporations both must be registered with the state and adhere to certain regulations such as establishing a board of directors and bylaws. They are both permitted to raise capital through the sale of stock.

Limited Liability Protection

Their Corporate status provides C Corporations and B Corporations with limited liability protection for shareholders, directors, officers, and employees. That means if the business is sued or incurs debt it cannot repay, those legal obligations generally cannot become the personal responsibility of individuals within the company and personal assets are protected.

Method of Taxation

Both subject to federal and state corporate income tax, and both may qualify for certain tax credits and deductions. Like a C Corporation, a B Corporation can elect to be taxed as an S Corporation, which is simply a Corporation that meets certain qualifications that enables the IRS to give it a special tax status. Members of B Corporations that are taxed as C Corporations may be subject to double taxation, meaning that the business must pay corporate income tax before any dividends can be distributed to shareholders, and shareholders are taxed on the income they receive from those dividends. Unlike a C Corporation, an S Corporation or B Corporation that’s taxed as an S Corporation isn’t taxed on its earnings. Earnings are passed through to owners, who report them on their personal tax returns and pay according to their individual tax brackets.

Regulatory Compliance

C Corporations and B Corporations must comply with state and federal regulations regarding annual reports and disclosures. Both must obtain all necessary licenses and permits, and both are required to have a registered agent who is authorized to receive legal correspondence on behalf of the business.

B Corporations vs. Certified B Corps

As mentioned earlier, there is a difference between a Benefit Corporation and a Certified B Corp. A Benefit Corporation is a business that’s incorporated in a state that recognizes that form of business entity. Most states, but not all, recognize B Corporations as a legal structure.

Laws and standards vary from state to state, but Benefit Corporations are generally required to meet certain standards:

• Adhere to a Corporate mission of creating positive societal impact while protecting the environment.
• Make decisions based on the benefits to stakeholders, including employees, the environment, foreign partners, and others, in addition to shareholders.
• Provide an Annual Benefit Report covering overall social and environmental performance that is available to the public.

A Certified B Corp is a business that’s certified by B Lab, a nonprofit founded in 2006 that oversees businesses going through the B Corporation certification process. A business that is registered as a B Corporation meets B Lab’s legal accountability requirement, but must also undergo a rigorous review process and meet high standards for social and environmental performance.

Once certified, a company must pay B Lab an annual certification fee for the use of intellectual property, in addition to applicable state fees. In addition, it must repeat the review process every three years.

According to B Lab Global, certification signals that a company meets high standards and is recognized for its commitment to social and environmental accountability. There are more than 6,000 Certified B Corps in more than 80 countries, including these well-known companies:

• Warby Parker
• Patagonia
• Etsy
• Ben & Jerry’s
• Kickstarter
• UncommonGoods
• org
• Toms
• Seventh Generation

Advantages and Disadvantages to Consider

Advantages of C Corporations

You’ve already read that members of C Corporations and B Corporations benefit from the advantage of liability protection, although there are some exceptions to that protection. Other advantages of C Corporations include:

• Corporations are generally viewed as stable, which can enhance public perception and increase a company’s credibility. A Corporation conveys a message that it is a professional business endeavor that intends to maintain operations for a long time.
• Ability to raise capital. A C Corporation can sell shares of company stock to raise capital needed for operational or investment purposes. Because it can have an unlimited number of shareholders, a C Corporation can sell as much stock as it wishes, although it may be required to register with the Securities and Exchange Commission. This ability to raise capital helps C Corporations to be able to expand and grow.
• A C Corporation is legally separate from its owners, meaning it can continue to operate regardless of the fate of shareholders, directors, or officers. The ability to transfer ownership interests enable C Corporations to continue operations through changes of ownership, deaths of principals, and other circumstances.

Disadvantages of C Corporations

As with any type of business structure, there are some disadvantages associated with C Corporations, including the problem of double taxation that was mentioned earlier. Other disadvantages include:

• More complex organizational structure. C Corporations can be complex organizations, which can slow down decision making and threaten the efficiency of operating practices.
• Higher costs. The complex nature of C Corporations can make them more expensive to form and maintain due to legal fees and administrative costs.
• More compliance issues. C Corporations tend to be regulated rather heavily and must meet higher compliance requirements than some other types of business structures.
• Limited control for shareholders. Because a C Corporation’s management oversees day-to-day operations of the business, shareholders typically have limited control.
• Managerial issues. Management and shareholders aren’t always in sync regarding the best way to run the company, raising the possibility of conflict.
• Vulnerable to takeovers. Business takeovers are not uncommon in the Corporate world. While these transactions sometimes result in growth opportunities, they also can present challenges.

Advantages of B Corporations

Socially and environmentally conscious entrepreneurs might consider the biggest advantage of a B Corporation as the ability to promote public benefit and B Corporations also enjoy some of the benefits noted for C Corporations. Other advantages include:

• Ability to address important issues. Owners of B Corporations often gain satisfaction from addressing pressing issues such as climate change, misuse of natural resources, poor living conditions for many, and income inequality.
• Attract like-minded employees. A company operating as a B Corporation is likely to be attractive to like-minded people who share its mission. And because B Corporations typically prioritize the interests of employees, there may be higher levels of employee engagement and satisfaction.
• Higher levels of customer trust. Customers who are socially and environmentally conscious may be drawn to B Corporations through a shared sense of mission.
• Attract certain types of investors. Investors looking for companies that exhibit socially and environmentally responsible behaviors are likely to be open to providing funding for B Corporations.
• Legal protections. Because a B Corporation is a legal entity, its mission and values are protected even if the company’s ownership or management changes.

Disadvantages of B Corporations

Although public awareness about B Corporations is increasing, they remain a relatively new type of business entity, with many people still unfamiliar. This can lead to a lack of understanding among potential customers and investors who don’t understand the benefits of this type of business. Other potential disadvantages include:

• Must adhere to state registration requirements. Unlike a business entity such as a Sole Proprietorship or Partnership, a B Corporation must meet all requirements for registering with the state.
• Difficult certification process. A B Corporation that wishes to become a Certified B Corp must undergo a lengthy certification process, involving considerable time and expense. It also must be periodically recertified and pay annual fees to B Lab.
• Problems balancing profit with mission. Any Corporation must realize a profit to continue to operate. Some B Corporations may find it challenging to balance the need to generate a profit with its social and environmental missions.
• Possibility for conflict. Because a B Corporation is not obligated to prioritize only shareholders, disagreements could occur regarding how profits should be divided and distributed.

Considering What’s Best for Your Business

As you can see, there’s a lot to unpack about B Corporations. If you’re considering starting one, I’d highly recommend that you learn all you can about them, making sure you understand the difference between a legal entity recognized by the state as a B Corporation, and a business that’s been certified by B Lab and authorized to brand itself as a Certified B Corp.

Both C and B Corporations are more complex and difficult to get started and maintain than a Limited Liability Company (LLC) or some other types of business structures. If you’re interested, research the relatively new Benefit LLC business entity, which combines some components of a B Corporation with the less-stringent regulations of an LLC.

Starting a business is exciting, and a B Corporation can be particularly appealing to an individual or group of entrepreneurs who are passionate about social and environmental causes. The process can seem overwhelming, however, so don’t hesitate to reach out for professional help when necessary.