Mercer Capital's Financial Reporting Blog

What Is a B Corp?

S Corp and C Corp are familiar enough designations for businesses, but what about a B Corp? Legislation recognizing a B Corp (short for Benefit Corporation) as a legal corporate structure currently exists in 27 states. The B Corporation status comes with a new set of implications for investors and some of these may even spill over into the arena of fair value for financial reporting.

B Corps reside in an area between nonprofits and for-profit organizations. While B Corps may still pursue profitability and growth, they are not singularly beholden to profit motives of their investors. B Corps must have stated social or environmental missions that they pursue in addition to generating earnings. When necessary, B Corps may place the welfare of certain stakeholders ahead of shareholders’ interests. Firms opting for the legal designation have a legally binding fiduciary responsibility to workers, the community, the environment, and shareholders. However, B Corps are not tax-exempt in any state that recognizes them.

While this is all well and good for other stakeholders, is it bad news for B Corp investors? Not necessarily. Some startups going through high growth phases may be reluctant to secure private equity funding for fear of losing control of the business’s strategy and corporate culture. B Corps may be able to attract investors with goals that match their own and raise capital without the fear of giving up a long-term vision.

As in the case of ice cream maker Ben & Jerry’s, B Corp status may also allow a company to defend itself from unwanted takeovers. Ben & Jerry’s (a public company at the time) was acquired by Unilever in 2000, reportedly against the wishes of its cofounders and various directors. Legal B Corp status may have allowed the company to remain independent by citing its responsibilities to employees and the environment. Obviously investors would have missed out on a payday, but for entrepreneurs seeking to retain control, B Corp status could allow a company to expand ownership while maintaining operating practices and activities that may not be aligned with short-term profitability.

How might B Corp status impact fair value for financial reporting? The concept of the market participant is central to the definition of fair value, whether in reference to the value of an asset or value of a business interest. If that asset or business is encumbered by certain ownership and/or usage restrictions, does this change the pool of likely market participants? In turn, does that narrower view of market participants influence fair value? These are evolving issues that accountants, valuation professionals, and standards-setters will need to address.

B Corps are a relatively new concept and only time will tell what risks and benefits they will ultimately confer to investors. For the time being, however, they offer business owners an alternative perspective on raising capital and offer investors opportunities to invest in companies that may otherwise not have considered it.

Mercer Capital’s Financial Reporting Blog

Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.