So, Kickstarter Went B Corporation
Kickstarter got some well deserved publicity for electing to become a Delaware B Corporation (more formally referred to as a public benefit corporation) rather than continuing its status an elective B corp. That is commendable and I applaud their decision but it must be said that, well, your company probably isn’t Kickstarter. I have written in the past about why social enterprises should think long and hard before making this legal status binding. Rather than restating those points, let me point out why it may well work for Kickstarter (and its existing apparently very happy investors) but it would not be wise for most social enterprises (or regular businesses that aspire to have some social benefit beyond simply making money for shareholders).
Kickstarter is Not Raising Money and Does Not Need to Do So
According to current investor Chris Sacca, “[Kickstarter] is a fast-growing, highly profitable enterprise.” Highly profitable enterprises do not need to worry very much about what future investors think about their corporate structure. If your company does not need investment now or in the future, you may not care either. However, most private companies do not have that luxury. Some potential investors will not like the public transparency. Some might not like the causes the company elects to support. As I have said before, many investors (especially institutional investors) simply run from anything “new” like the plague. The reality is that until issues like fiduciary obligations of B Corp directors, derivative lawsuit claims, enforceability of investor protections and a host of other issues are addressed by Delaware courts through fact specific litigation, expect most sophisticated investors such as venture capital managers to be leery at best. Their cautious lawyers will be all the more suspicious. Don’t need the money? Then have at it. Not sure? Being a bit more measured is probably prudent.
Kickstarter is Apparently Not Planning on Selling . . . Ever
Ok, here is where Kickstarter gets to really rarefied air. According to the New York Times, Kickstarter CEO Yancey Strickler stated that, “We don’t ever want to sell or go public.” Well, that might come as a bit of a surprise to the limited partners of the venture funds that already invested. Suffice it to say that the B corporation is going to complicate either a sale or an IPO. It probably won’t make it impossible, but it will be an issue–especially early on in the life of this relatively new statute. As a lawyer that has long advised companies in sales and IPOs, added complication isn’t exactly a welcome visitor to the sale or IPO. If you are amongst the business owners that intends to never sell or IPO your company, I guess you don’t care. I don’t know too many of those business owners. In fact, those owners probably don’t care enough to be reading this blog either so I am assuming that if you read this far, you’re probably not like Kickstarter in this regard.
The Tax Man Doesn’t Care About Your Social Purpose
Kickstarter had no choice but to be tax inefficient. You probably do have that choice and making a decision to be a B corp may well kill it. Part of Kickstarter’s adopted social charter is apparently to remain as tax inefficient as possible (or at least to avoid dirty loopholes). Good for them! However, Kickstarter was a C corporation for tax purposes before it elected B corp status and it will simply continue to be a C corporation afterwards. C corporations are generally tax inefficient. Kickstarter had no choice but to be a C corporation because of the tax requirements of its own venture capital investors. Is that the case for your private company? It may sound stupid to state the obvious but Delaware B corporations are, well, corporations under Delaware’s General corporation law. As such, they will either be S corporations (if eligible and properly elected) or C corporations. In either case, the tax efficiency and structural benefits of a limited liability company taxed as a partnership are off the table.
The Social Purpose Can Be Achieved Without B Corp Status
As I have said before, I really like social enterprises and I am glad that the option to be a public benefit corporation is now out there in many states. However, keep in mind that Kickstarter already did many of these things before electing formal B corp status and your company can likely do so without making a decisions that will be potentially limiting and potentially difficult or costly to unwind. That is the real bottom line: you can achieve all the same goals without making a decision to organize as a B corporation. It’s sort of the present day version of “Come on sweetheart, do we really need a certificate from the state to prove we are committed?” Only in this case, your mother probably does not really care if you get the state certificate. If you can achieve the result without the risk, why would you? Maybe you are like Kickstarter . . . but the reality is that your business probably isn’t.