Different Types of Social Impact Companies

Increasingly, companies are turning away from the traditional business model that narrowly focuses on maximizing profit without regard for its impact on other stakeholders. They’re moving toward a broader approach which emphasizes engagement with social causes in an effort to establish a reputation with consumers and investors of being a socially impactful company. Social impact means having a significant, positive impact in bringing about changes that solve or address social injustices. There are various types of companies which work to bring about this change, such as: B corporations, social enterprises, benefit corporations, L3Cs, and socially responsible businesses.

(For more about social impact, see: https://careerhub.students.duke.edu/blog/2021/09/03/social-impact-definition-and-why-is-social-impact-important)

B Corporations

Founded in 2006, B Lab is a non-profit organization which awards B corporation certification to for-profit companies. Status as a B corporation is a tangible assurance to consumers and investors that a company has high social impact written into its DNA. There are three requirements to certification. First, an organization must achieve a B Impact Assessment score of at least 80. The B Impact Assessment looks at the organization’s performance on social and environmental issues. Second, the organization must either become a benefit corporation (if their jurisdiction allows for this) or change their governance structure to be accountable to all stakeholders rather than merely to shareholders. The third requirement is that the B corporation demonstrate a commitment to transparency by allowing publication of their performance as measured against B Lab’s standards on B Lab’s website. B corporations include many prominent organizations such as Patagonia, Ben & Jerry’s, and Nespresso.

For more information about B corporations.

Social Enterprises

There is a similar organization in the United Kingdom called a Social Enterprise. To be certified as a Social Enterprise company, an organization must: have a social or environmental mission stated in its governing documents, be an independent business earning more than half their income through trade, be controlled/owned in the interests of their social mission, invest half their profits toward a social purpose, and commit to transparency. Certification is awarded by the organization Social Enterprise UK (“SEUK”). A certified Social Enterprise in the United Kingdom should not be confused with the more general usage of the term social enterprise in the United States to refer to social impact companies.

For more information about Social Enterprises.

Benefit Corporations

Benefit Corporations are another type of entity in the US. Many people believe that Benefit companies are the same as B Corps—but they are distinct. Nearly all B Corps are benefit companies; but not every benefit company will receive the B certification. The benefit corporation status refers to the structure of corporate governance rather than certification by an independent organization. While profit is still the primary purpose of these corporations, companies with benefit corporation status are able to take into account othergoals such as creating a positive social, community, or environmental, etc.. In fact, impact is explicitly designated as being within the best interests of the company. The practical effect of this is to insulate directors from certain types of liability to shareholders and allow them the freedom to make decisions which many not necessarily increase shareholder value but do increase the company’s stated public benefit goals. The ability to incorporate as a public benefit corporation varies by jurisdiction and currently there are thirty-five states which allow for such incorporation. Notable public benefit corporations include Warby Parker, King Arthur Flour, and New Belgium Brewing Company.

For more on benefit corporations.

L3Cs

A low-profit limited liability company, or L3C, is a type of LLC that functions both to obtain profit and further social causes. However, for an L3C, the goal of increasing profits is secondary to the goal of furthering social causes. These companies are often hybrids with aspects of both for-profit and non-profit organizations. To comply with typical statutory requirements, an L3C must significantly advance a charitable or educational purpose, the production of profit must not be a significant purpose of the L3C, and the L3C cannot have a political or legislative purpose. L3Cs were created to be a type of business which complies with the IRS’s requirements for a business to which a program-related investment (PRI) can be made. PRI’s are an important source of funding for many L3Cs. Being relatively new, L3Cs are less widespread than benefit corporations and currently only eleven states and Puerto Rico allow incorporation as an L3C.

For more information relating to L3Cs.

Socially Responsible Businesses

An entity does not need to be a benefit corporation, an L3C, or be B corporation certified to be a socially impactful company. With increased consumer awareness and focus on the social impact of companies, practices which maximize profits and practices which are socially impactful often overlap. Practicing corporate social responsibility (CSR) increases customers’ perception of a company which leads to increased revenue. One way investors are able to evaluate a company’s social benefit is through Environmental, Social, and Governance (“ESG”) metrics. Commonly thought of as an investor metric, ESG is the idea of investing in companies which promote pro-social policies with the goal that these policies will add to their investment.

Among the numerous intangible benefits to practicing CSR are helping companies to create a culture where employees feel they are making a difference, thereby leading to higher employee attraction/retention rates, and driving innovation. Additionally, a dedication to CSR is often a selling point to investors, who want to maximize their profits while still supporting social causes they care about. An important way for a company to be socially responsible is to commit to ethical supply chains, especially ensuring that their supply chain practices do not contribute to human rights abuses.

Click here to learn more about the benefits of CSR.

Disclaimer: The information in this article is provided for informational purposes only. You should consult with an attorney before you rely on this information. This information should not be seen as legal advice and does not create an attorney-client relationship. This article is meant to be a general discussion and may not include all relevant information regarding the issues covered.