Decision Vision Episode 75: Should I Form a Benefit Corporation? – An Interview with Juliana Neelbauer, Drew Eckl & Farnham
What is a benefit corporation, or B Corp, and why would I want to form one? What are the legal obligations of such an entity? Juliana Neelbauer of Drew Eckl & Farnham discusses these questions and much more with host Mike Blake. “Decision Vision” is presented by Brady Ware & Company.
Juliana Neelbauer is a senior attorney who is the outside general counsel for companies that are product- or SaaS-centered, or IP-driven and that work with data and sensitive information in highly regulated industries. Her practice leverages her insights in cybersecurity, data management and analytics, government contracting, fintech, consumer-web, enterprise-software, health care delivery, medical products, supply chain, film, and political action sectors. She handles the full lifecycle of her clients’ needs including venture capital or private equity rounds, subsidiary formation, contract or governmental compliance, licensing, international transaction, and mergers and acquisitions. She is known as an attorney who brings an operator’s mindset, a technologist’s know-how, and an executive’s strategy to her clients’ legal concerns.
Prior to joining Drew Eckl & Farnham’s Atlanta office, Juliana was the chief operating officer of Ad Hoc LLC. Ad Hoc is a Maryland-based mid-market federal contracting company that builds custom web portals that deliver government services to millions of Americans. Juliana oversaw the scaling of Ad Hoc from a 2-person small business to a 90-employee mid-market prime contractor with a 10x increase in revenues within a 14-month period.
Juliana started her career in software and business operations, founded two high-growth companies, and has overseen the scaling of many startups and mid-market companies in the tech industry before building a technology-focused law firm in the DC-metro area. She was born in Decatur and after more than 18 years away from the State, she was happy to return with her husband and daughter in 2017 to build the Drew Eckl & Farnham technology law practice in Georgia.
Drew Eckl & Farnham
Drew Eckl & Farnham is a full-service law firm that offers deep litigation experience, strategic corporate and transactional counsel, and practical legal advice to companies, individuals and families. Their approach to practicing law is to resolve each new legal matter as expeditiously and efficiently as possible. They strive to propose a legal strategy that directly correlates with the risks involved.
Powered by their diversity, innovation and commitment to the communities in which they work, Drew Eckl & Farnham has grown to more than 100 attorneys in Atlanta, Albany and Brunswick, Georgia and serves local and national clients throughout the Southeast.
Michael Blake, Brady Ware & Company
Michael Blake is Host of the “Decision Vision” podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
“Decision Vision” is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision maker for a small business, we’d love to hear from you. Contact us at firstname.lastname@example.org and make sure to listen to every Thursday to the “Decision Vision” podcast.
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Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:22] And welcome to Decision Vision, a podcast giving you, the listener, a clear vision to make great decisions. In each episode, we discuss the process of decision making on a different topic from the business owner’s or executive’s perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:42] My name is Mike Blake and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio. With offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta for social distancing protocols. If you like this podcast, please subscribe on your favorite podcast aggregator. And please consider leaving a review of the podcast as well.
Mike Blake: [00:01:09] So today’s topic is, should I form a B Corporation? Sometimes also known or maybe more often known as a benefit corporation. And this topic has triggered, I think, simply because I find myself hearing about B Corps or benefit corps with increasing frequency. To be perfectly candid, I had never heard of one until about, I’m going to say, four or five years ago when I was retained to perform an appraisal of one that was a startup software company. And that’s the first time that I had encountered it.
Mike Blake: [00:01:52] And, you know, it was novel. It was interesting. And it gave me a chance to do an assignment where you learn something new as the provider. You know that’s always a good thing. And, you know, I sort of filed it away. And, you know, in the last few years, I hear B Corporations being mentioned more frequently. They’re talked about more often, I think, frankly, as more of the younger generation, whether it’s millennials or Generation Y or Z or, I guess AA comes after that if you’re thinking Excel spreadsheets.
Mike Blake: [00:02:28] But, you know, as more companies and company founders, I think, kind of reject the Friedman kind of notion where building shareholder value holds primacy above all other objectives. And we’re seeing the pendulum kind of swing back to a stakeholder point of view that B Corporations have become increasingly important. And I paused on my brain now because I’m trying to remember if they have been authorized in Georgia very recently or they’re on the verge of being authorized. And our guests will correct me there. I’m sort of spacing out on it. But we’re about to be one of the states that allow this. The majority of U.S. states allow them now, but not every single one.
Mike Blake: [00:03:19] And, you know, they’re kind of neat. And depending on what your desire is for a company you already have or company you’re going to found, you know, this may be the first time you’re hearing about a B Corp or maybe you’ve heard about it before but you never really took the time to sit and research it. So, this is your opportunity while you’re driving, or jogging, or cooking, or building bird houses out of wood, or tinkering with your car, or replacing a graphics card in your computer, whatever it is you’re doing while you’re listening to a podcast. Here’s an opportunity to kind of learn something more about it.
Mike Blake: [00:03:59] And, you know, it’s kind of interesting because – and this is the accounting geek in me. Although, I’ve repeatedly protested many times I’m not actually an accountant. And it’s instantly malpractice for me to call myself one. But you really don’t hear of, like, a new kind of company of – sorry – corporation or corporate form being created, right? You just assume that there’s S Corps, there are C Corps, there are limited liability companies, partnerships, sole proprietorships, et cetera. And they’ve been around forever. And that number kind of is a static. It’s something like talking about adding a new state. It’s like, “That’s kind of cool. Where are they going to put the extra star?” Fifty one is a hard number to divide well because it’s a prime number – not a prime number. But it’s a weird number.
Mike Blake: [00:04:48] And so, when a new kind of corporate form comes along, you kind of perk your ears up and say, “Okay. Well, here’s something that’s gonna be a little bit different, a little bit out of the ordinary, a little bit novel.” So, I have told you now the sum total of my knowledge. I have literally spewed it out onto the internet and podcast form in terms of my sum knowledge of a B corporation.
Mike Blake: [00:05:13] So as we do on the Decision Vision podcast, I’m inviting an expert on it. And joining us today is my friend, Juliana Neelbauer, who is a senior associate at Drew Eckl Farnham, a law firm here in Atlanta. Drew Eckl and Farnham is a full service law firm that offers deep litigation experience, strategic, corporate, and transactional counsel, and practical legal advice to companies, individuals, and families.
Mike Blake: [00:05:39] Juliana focuses her practice on virtual general counsel for for-profit, nonprofit, charitable, trade organizations, high net worth individuals, and families which hail from the consumer technology, commercial technology, healthcare, industrial/supply chain, finance government contracting, charitable, and political action industries.
Mike Blake: [00:05:58] Prior to joining Drew Eckl. Juliana was the chief operating officer of Ad Hoc LLC, a fast growth federal prime contracting company that builds custom web portals to deliver government services more efficiently to millions of Americans by using agile software development and other modern web development methods. Juliana oversaw the scaling of Ad Hoc from a nine-person small business to a 90 employee mid-market prime contractor, with a ten times increase in revenue within a 14 month period.
Mike Blake: [00:06:26] And the cool thing I like getting to do these podcasts, I’ve known Juliana for a couple of years. I did not know that about her. I knew about Ad Hoc. I did not know that she led that kind of growth. So that’s awesome.
Mike Blake: [00:06:36] In the academic realm, Juliana has organized a legal clinic program for hacker participants of the University of Maryland’s Bitcamp, Georgia Tech’s HackGT, and University of Maryland’s all female technical hackathon events. She served for half-of-a-decade as the attorney advisor to the executive board and entrepreneurs of the Student Governance Startup Shell Incubator of the University of Maryland campus. And as a business mentor and lecturer for the Mtech Program at the Clark School of Engineering. And for Fearless Founders classes at the Dingman Center for Entrepreneurship in the Smith School of Business at the University of Maryland. Juliana is a pen undergraduate interviewer for the North Atlantic region and a past board member of the Pen Club of District of Columbia.
Mike Blake: [00:07:20] Juliana, welcome to the program.
Juliana Neelbauer: [00:07:23] Thanks for having me, Mike. It is good to have you. It’s weird that we’re not eating biscuits this time. I think that’s when we first met, we got biscuits. And so, that felt like the right thing to do when we were outside of Atlanta at the time.
Mike Blake: [00:07:36] Well, it was. And one of the reasons that I took an instant liking to you as well. So, thank you for that. I don’t say that about many people. I normally take an instant dislike. So, they’re on the narrow side of the ledger there.
Juliana Neelbauer: [00:07:53] We’ll see if it — before the end of the podcast, Mike-
Mike Blake: [00:07:57] Right back at you. Well, we’ll see if we’re still Facebook friends at the end of this. But let’s start off very basic. What is a B Corporation?
Juliana Neelbauer: [00:08:09] Sure. So, a B Corporation, as you pointed out in the beginning, is a new corporate form or business entity, business organizational form. And what does that mean? Well, on the most basic level as a business owner, you have a choice of what kind of entity you want to form in its legal form. And then also what kind of tax treatment you want your entity to have. And the reason why you might form it is, just because you didn’t even mean to, but you just started engaging in business activity. And by doing so, in certain states, that automatically makes a business arise around you and with you, whether it be a sole proprietorship that you never register anywhere, or a general partnership, or a partnership with you and somebody else.
Juliana Neelbauer: [00:08:56] And then some of us choose to actually register those things. And when you do, you have, as you mentioned, all these choices. You have your corporations, which can be C Corporations or S Corporations for tax purposes. That’s a tax status, actually, more than a legal status. And then your LLCs, your limited liability corps, your various forms of limited partnerships, your general partnership, and then your nonprofit. And so, those are the most common forms.
Juliana Neelbauer: [00:09:21] Now, there’s a new kid on the block. And it’s these B Corps or BLLCs or KBCs. And we can talk a little bit more about the differences if it would be of interest to your listeners.
Mike Blake: [00:09:35] I’m sure it would be. So, we’ll put a pin on them and come back to it. So, can you sharpen my knowledge? I know there’s something going on with B Corporations in Georgia. Are they just about to be authorized? Have they been authorized? Where are we in our state for that?
Juliana Neelbauer: [00:09:52] Your instincts are right. We have passed both the House and the Senate in Georgia. And the General Assembly have passed a benefits corporation law, which is Georgia House Bill 230. You can look it up online, it’s available. And you can see the full text if you Google it for the General Assembly site. And then the governor is in a period of review. And until August 5th, he may veto this bill even though it was passed. And we don’t expect that to happen. But Governor Kemp has said some things that have surprised business in the past. And so, we’ll see what happens. But the outlook and the prognosis from all of the policy wonks here is that he’s either going to let it lie, which will make it automatically pass at the end of August 5th, or he will actively sign it in to put his signature on it and show that level of executive support politically for it.
Juliana Neelbauer: [00:10:45] And one thing to note is that Georgia’s law is not really controversial within the B Corp community. There is almost a trade or some folks call it the benefit economy of businesses that are already engaging in this type of business. And so, as each state decides whether it’s going to adopt one of these laws and is often being heavily lobbied to do so, they can add their own elements into each of these state laws. They can be a little bit different the way the corporate forms work. But Georgia’s is pretty vanilla. So, when we talk about what Georgia has passed in this podcast, it will apply to most of the other states that you would look at and sort of shop when you’re thinking about where you might want to form one of these.
Mike Blake: [00:11:35] So, how long have these B Corporations been around? Because we talked about not too long, but how long have they been around? And do you happen to know kind of what state authorized them first?
Juliana Neelbauer: [00:11:48] I knew you were going to ask me that. And then, I wasn’t 100 percent sure that I could tell you which state for sure. But I know that Delaware was one of the first. As normally the case, when you are trying to create something new in the corporate legal sphere, it’s smart as a trade group to target Delaware because the Delaware court system is older than our country when it comes to the corporate law that has been established there. And so, in fact, this is one of the primary reasons why shareholders, investors, and major businesses register in Delaware.
Juliana Neelbauer: [00:12:24] It’s not as many new folks getting into business believe because the taxes are better. In fact, the tax rates are often worse when you’re starting out in Delaware. There are tax advantages that you can capture once you’ve gotten bigger, and especially as you go public. But when you’re a private business starting out, it’s actually the corporate tax rates and some of the filing fees are much higher than other states. And so, that’s not why you pick Delaware. You pick Delaware because it’s an old court system. And when you’re in business, you like things that are old in the legals realm because then they’re predictable.
Juliana Neelbauer: [00:12:57] And uncertainty is your enemy, right? Uncertainty means you have to spend more money to prepare for more contingencies. And that’s expensive when you could instead know the future, know how the courts are going to rule, and either settle more disputes outside of having to go to court, or know exactly how much it’s going to cost you if you do. So, you want to target Delaware and that’s what we have here. So, the public benefit corp law in Delaware or PBC form has been established. And it’s been around, I think, for at least maybe over ten years for sure. And the real movement and the push to make this a nationwide opportunity, where there is active lobbying in all state legislatures and organized lobbying to make public benefit corps or, really, just B Corps, which is sort of a more common name for them now, to be pushed through.
Juliana Neelbauer: [00:13:59] It started in 2006 when one organization, a trade group called B-Lab, was formed by three founders. I’m just gonna go ahead and tell you that it’s Jay Coen Gilbert, Bart Houlahan, and Andrew Kassoy. And for those who are from the startup community, whether it be fashion or retail or traditional technology startups, you might recognize their names. They are the founders of AND1, which was a very popular retailer that sold athletic wear, including shoes. And they had a very successful growing fast growth company. That, unfortunately, for them, once they got some additional funding in one of their realms, they gave up control of their company.
Juliana Neelbauer: [00:14:43] And their director, who was then made chairman, had so much power that he had a differing opinion than they did as far as how they should operate their company. And made some decisions that they felt were not in the best interests of society at large and the environment. And that they felt would actually hurt marketing for their company. And therefore, hurt their bottom line. In putting all those three things together, once that company was sold at a price and at a stage that they felt was too early and too low, they were really passionate, even though they had – they had some capital, so they said, “Well, let’s actually fix this problem for the future. Let’s create a legal shelter under which founders can let investors know and also legally be allowed to make decisions that aren’t just to increase shareholder value, that don’t just go to Milton Friedman’s shareholder primacy philosophy and have the legal cover to do so.”
Mike Blake: [00:15:43] So, you know, there’s been some pretty good and some pretty significant uptake on this. I think one of the more famous early B Corporations was also Ben and Jerry’s, Ben and Jerry’s Ice Cream. And, you know, they would not consent to be acquired, unless they were acquired by some entity that was going to continue to pursue a social mission. Because that was always a big part of their culture. And I think that acquisition kind of led to kind of legitimizing, if you will, for lack of a better term, legitimizing the the B Corporation. And now, if I remember correctly, I read in a Forbes article recently, there’s over two thousand of these B Corporations around at least.
Juliana Neelbauer: [00:16:37] Correct. And those are just the one – well, there’s more than 50,000 that are certified by B-Labs. And they are, again, a trade group, but also a certifying organization. And so, you know what I should say? I believe that they have certified that more than 50,000 organizations are meeting the standards of what a B Corp would be required to do if they were a mission driven or a purpose driven organization. Now, I do not know if all of those are, in fact, registered as B Corps now that I think about it. That might have been a nuance in their marketing that I would want to see.
Juliana Neelbauer: [00:17:15] But to your point, there are thousands of these around the country now, more than 35 states. Once Georgia passes its law, which we expect to happen again on August 5th, have these laws on the books so that you can form these. And so, more and more of them are being formed every day.
Juliana Neelbauer: [00:17:31] In my practice, I would say about, maybe, 30 percent of the clients who contact me to form a new business in the last year have asked me about B Corps and benefit corps and public benefit corps. And asked me, “Is there a benefit to me doing this for my business?” And so, we’ve walked through that analysis quite a bit in the last –
Mike Blake: [00:17:55] Thirty percent? That’s a much bigger number than I would have expected.
Juliana Neelbauer: [00:17:59] Yeah. And that might be my target audience, which is a lot of technology companies. It’s a lot of second time entrepreneurs as well. So they’ve had a nice exit and now they really want to do the company – they want to operate it in the right way. You know, fix all the problems, you know, as a company even if it was successful. And then they also want to have the company be more purpose driven because now they can do what they really always wanted to do, not just what they thought they economically needed to do. Does that make sense?
Mike Blake: [00:18:27] Yeah. No. It sure does. As a give back mode that a lot of tech entrepreneurs kind of enter once they’ve had that big exit.
Juliana Neelbauer: [00:18:36] Right.
Mike Blake: [00:18:38] So, you know, there’s already a nonprofit corporate structure out there. Why is a B Corporation needed? Why is there room for the B Corporation to exist when a nonprofit organization exists or maybe a for-profit but has a specific mission why they take Newman’s zone? Where they’ve been very open, that, basically, their profits or most of them go to various charities, I think mostly for sustainability. Why was the development of a B Corporation needed or welcomed when you sort of have a nonprofit structure already available?
Juliana Neelbauer: [00:19:19] Yeah. That’s a great question. I think there’s actually two different answers. And so, I’m gonna try to wear both of my business side hat and my law hat. On the legal side, there’s a need for it because on the nonprofit side, you know, you have a mission. It is defined. It must be defined in your charter. It is also something that you calculate against when you file your quarterly and annual tax returns to the IRS and then also to your state. And so, it’s very important that you are working within your mission.
Juliana Neelbauer: [00:19:53] In fact, it can affect whether you maintain your nonprofit status or you don’t. If you are not meeting certain thresholds as far as how much of your activity is falling within the parameters of your mission activity versus activity that’s outside of your mission. And that can include both spending and also taking in of income. And so, that’s a very rigid structure.
Juliana Neelbauer: [00:20:16] And that can be hazardous if you are a new organization and you’re not sure what that balance between your activities that you have to engage in, in order to keep your lights on, to bring in income into the organization. Whether that is going to be sufficient on the mission side in order to keep your lights on. Whether you’re going to have enough donations. When you’re a new organization, you’re unknown. Versus activities that you know you can immediately generate revenue. But that might not qualify under the IRS tax – the IRC for being within a mission.
Juliana Neelbauer: [00:20:52] So, for instance, one of the quintessential trips of nonprofits is selling T-shirts or merchandise. Very often you can actually include merchandise sales for T-shirts or mugs within your mission, even if you just, you know, put your logo on there and you do it for a fundraiser. There’s very specific rules for how you can do that and get away with that and not be subject to having reclassifying of that income when you go through an audit. And so, that rigidity puts off a lot of organizations, a lot of founders, especially those who are maybe even sophisticated in business, but not sophisticated in law or taxes, tax law in particular. And they avoid the nonprofit form for that reason. Or it just doesn’t work for the scale phase of their organization.
Juliana Neelbauer: [00:21:40] And so, in that scale phase, they opt in for an LLC or a C Corp, which allows them to go after whatever revenue generation they can, help some scale organization. And then down the road, maybe they spin out. They form a separate nonprofit and fund that nonprofit with proceeds from their personal funds, from the business, their compensation or through marketing activities of the business or what have you.
Juliana Neelbauer: [00:22:05] And it’s imperfect. And there’s a friction there for those founders who have said I want to be more true to what this organization is really about. I want to be more honest with my shareholders and my investors. I want to be able to be as honest as I can without creating liability for myself by saying I want to spend 30 percent of the revenue that comes in the door. Or, at least, the net, you know, the profit that comes in the door on social good activities, environmental activities. Or I want to be able to opt overtly for the vendors that costs more in the supply chain, but that do better work, that don’t use sweatshop labor for, you know, the sewing of the garments that we produce or what have you.
Juliana Neelbauer: [00:22:51] And so, in those cases, there was actual legal liability that could arise not only if you mismanage your nonprofit and lose your standards because you’re not perfectly meeting these requirements while you’re trying to keep your organization alive.
Juliana Neelbauer: [00:23:05] But then on the business side, if you have a for-profit business, you know, there is a famous case where Henry Ford, after Ford Motor Company was wildly successful and he’s invested a lot in the City of Detroit and the State of Michigan. And while he was helping his organization, one point he started to give out double digit percent of the net profit to these really, truly charitable aims throughout the city. And his shareholders filed suit against him and said, you’re not following the Milton Friedman – you know, of course, that Milton Friedman was later. But you’re not increasing the value of the company with these actions.
Juliana Neelbauer: [00:23:46] You knowingly are spending money where dollar for dollar. There is no chance that this is going to increase the value of the shares of Ford Motor Company. And so, he said, “I’m a brilliant man who’s changed the face of the industrial economy in United States. I’ve created one of the most successful automotive companies in history. I get to do this. I am Ford Motor Company. Come on, courts, I’m going to win this case.” So, he fought back. He didn’t settle. He took it to the courts and he lost. And the court said, if you want to engage in charitable activity, form a nonprofit. And then we have the Ford Foundation as a result of that.
Juliana Neelbauer: [00:24:28] So, you know, cases like that are – and that’s probably the most famous one where we talk about the responsibility of shareholders to increase their shareholder value. But it’s a real risk. It’s a way to pierce the protection you, as a director or officer of a company, have when you create your business entity. And you register it and you get this corporate shield that protects you individually. And in your bylaws and in your operating agreement, if it’s written at all competently, it will say in one of the last clauses in there that the company agrees to protect you and indemnify you for the base. Effectively making a bad call or having bad judgment in business, which in hindsight is very clear.
Juliana Neelbauer: [00:25:14] But the problem is, if you do things that are overtly against creating additional shareholder value or that there’s really no justification you can make other than I just did this for the good of the community, not for the good of the company. That can pierce your protection within your organization. It can pierce those protections in the company. And so, if you look at those clauses, it will talk about willful and wanton negligence and willful and wanton activity, where you purposefully do something that is not in the best interest of increasing the value of your company. Boy, now you can be sued individually by your own company or by individual shareholders and have these derivative suits pop up.
Juliana Neelbauer: [00:25:57] And so, it’s a real risk on the legal side to take a significant portion of your business activity, of your time, of your team’s time and energy to engage in activities that don’t increase revenue, don’t increase profit.
Mike Blake: [00:26:14] So that’s good. That really lays out the case. I’m familiar somewhat with the Ford history. You know, ultimately, he was also deposed because he was declared insane. I have to wonder with that story that you just shared, I did not know that background. I wonder if part of the reason that his family tried to declare him insane is because he was spending money on that kind of stuff.
Mike Blake: [00:26:43] So I think you’ve done, frankly, a really good job of explaining kind of the gap that a B Corporation sells. Is it harder or easier to set up a B Corp versus other more conventional or more, I guess, this longstanding corporate forms
Juliana Neelbauer: [00:27:03] I would say on the spectrum between setting up an LLC, which is probably the easiest form to set up. I mean, there’s a website that will set this up for you for a couple hundred dollars. And you just click a few buttons and they’ll register it for you and they’ll create your corporate entity government documents as well as make the filings. All the way to the, I would say, nonprofits or certain kind of exotic holding companies that might be offshore, where you’re going to have an accountant and a lawyer and maybe multiple involved with setting up the initial company.
Juliana Neelbauer: [00:27:40] The B Corps would fall somewhere in the middle, but probably closer to the LLC. It’s really not that difficult to set them up. The reason why you will want to talk to an accountant or, better, a lawyer who’s done one of these before or are very familiar with the statute of your state in which you’re going to register it, is because they’re new, quite frankly. And there are a few clauses that you do need to put in your articles of incorporation or certificate of incorporation, which is the formal attestation that you’re going to file. The form that you’re going to file with the state you choose. And they’re not vanilla. They’re not the normal ones. It’s not the template that you’re going to find online.
Juliana Neelbauer: [00:28:26] Some states have automated registration now for business filings, which is amazing and wonderful, and democratizes the ability for people to create businesses, which I think is all a good thing. I would rather do less work myself as a lawyer on the front end of filling out throughout forms. And do more advising and have you spend your dollars and your time talking to lawyers to get real time and advice. And so, anything that makes that easier for you to do that, you know, it doesn’t require a kind of brainpower from a lawyer or an accountant is good.
Juliana Neelbauer: [00:28:57] But I don’t know if all of those forms are updated to include those extra clauses that you really do want to include when you register a benefit corp, a benefit LLC, a public benefit corporation, whatever the designation is for that state. I hope that they would. There’s also some, in addition to what the minimum you’d have to have in there, which is an extra clause talking about the mission. What is that social good, environmental good, public good mission that your organization is going to be evaluated against as whether or not it is on mission and it is acting within its requirements to be in the public benefit. You do need a clause for that for sure. And I would imagine that they would include that.
Juliana Neelbauer: [00:29:39] But in addition, you’re going to potentially want to add in your articles of incorporation a few extra statements to narrow the scope of responsibility of the directors and officers in this time where these are new. It is a little bit unclear how you’re going to balance shareholder value with the best interests of those materially affected by the corporation’s conduct. And then also kind of as a third category, the public benefit. Those are three different things. And so, you know, that is one of the risks legally and also on a business level for anyone who is going to form one of these or going to operate or govern one of these is, making sure that you have set in writing how you plan to balance these three things.
Juliana Neelbauer: [00:30:28] And in some cases, being more general could benefit you based on the type of business you’re engaged in. In some cases, being very specific is going to benefit you because you’re going to have a lot of professional investors who are going to absolutely hold your feet to the fire about this. And not be day to day involved in your business. And the understanding is at the end of the quarter of the year, you haven’t met what they consider success against that mission.
Mike Blake: [00:30:56] So, let’s talk about that, because I think that notion of the mission – I mean, it certainly sounds important. Intuitively, it’s important. I imagine you cannot simply write a clause or be hired to write a clause in your organizational documents and say, “Hey, we’re going to be a nice company and we’re going to do good social things full stop.” I imagine you probably have got some pretty specific language that defines kind of what that social or – maybe it’s not social, you know, that sounds kind of polarizing but what your non-business mission is.
Juliana Neelbauer: [00:31:35] Right. I think to answer your question – and we can actually look directly at the new Georgia statute, right? So, let’s use that as a template here. In Georgia, now, once August 5th passes and presuming Governor Kemp does nothing or signs this into law, either way, it becomes an effective form that you can file. You have to create a more objective standard for what your mission is and what success against that mission is than just generally saying we’re going to do good for the world or we’re going to do good for nature.
Juliana Neelbauer: [00:32:11] You have to no less than annually give to your shareholders and any other person who requested in writing a written report talking about your performance as a corporation, with respect to the public benefit or benefits that you included in your articles of incorporation. And by the way, your articles of incorporation are a publicly filed document. So, they can be audited by anybody.
Juliana Neelbauer: [00:32:38] And this sounds like – the statute sounds like truly anybody could have a standing to say, “I don’t think you’re meeting your mission. I don’t think you’re performing sufficiently.” Or, have you even created this report? Are you in violation of the law? And if you haven’t been creating these annually, then right there you have a ding. You could potentially lose the right to have your corporate form. And that creates, most importantly, liability for you with your shareholders so they could have derivative suits against you from mismanagement of the organization.
Juliana Neelbauer: [00:33:10] And then, within the report, well, what has to be in there? Georgia actually tells you, you have to create specific objectives for the board of directors in connection with that pursuit of the mission. There has to be standards that are defined, that are measurable, that the board has adopted, that show that the company is either progressing or not progressing positively in pursuit of those benefit or benefits. And then, you have to provide some factual information that can be used to flush out those standards. And so, it can’t just be a report with a spreadsheet with calculations that are not explained with effectively history of facts or specific events that have occurred that support that the numbers are, in fact, tied to activities that occurred in the real world and had real effect.
Juliana Neelbauer: [00:34:06] And so, that alone right there is a pretty heavy burden administratively compared to not having to do any of that.
Mike Blake: [00:34:16] Yeah. And I mean, that’s really interesting. So, I want to try to put the brakes here and really dive into that because I think that is so important. And I did not know that walking in. But, you know, on the finance side where I live, we have gap. We have generally accepted accounting principles that, you know, effectively is a common language that we pretty much all agree on in our society, at least in the financial world, where, you know, a dollar in revenue equals a dollar in revenue, profit equals profit, et cetera, et cetera.
Mike Blake: [00:35:00] And we have a set of professional standards, even licensing, for people that aren’t experts in presenting to an external audience what the financial position and results have been for our company at a given point of time and over a given point in time. And commenting basis to whether or not the financial statements can be can be relied upon. Now, we’re adding this new benefits statement, for lack of a better term. Maybe there’s a term to award which I’m unaware.
Mike Blake: [00:35:34] And as you say, anybody can kind of make an objection and say, “Hey, I don’t think that you’re doing this right.” And it sounds like the burden of proof is on the company to prove that it’s meeting its objective, which is, that’s extraordinary. There’s very few areas of law, crippling from law to put the burden of proof on the defendant effectively.
Juliana Neelbauer: [00:36:00] Well, let’s talk about that. So, I want to say kind of, right? I suggest that let’s say kind of. Because, you know, what does this burden of proof mean? Like, what I’ve described so far as these factors, these elements that you have to meet, that’s about as detailed as the statute gets. And those are general statements. And so, yes, you have a burden to show that you’ve, in fact, gone through these steps and have some activity that shows that you have created objectives that are – you created objective factors and metrics and standards of what you’re going to be graded against. And that they’re going to be something that numbers can be applied to.
Juliana Neelbauer: [00:36:45] And then that certain factual information responsive to those standards – now, I’m quoting the statute. “Factual information responsive to the standards regarding your success or failure in meeting those objectives has occurred.” But beyond that, that’s all the statute really says, right? I mean – well, I shouldn’t say that. I just said a little bit more. But it’s pretty general.
Juliana Neelbauer: [00:37:07] And so, there’s a lot of what’s maybe more interesting to you is not that the burden of proof is shifted. You have to show that you’ve taken these steps and that you’ve done these things. What’s actually interesting is that you suddenly have a new kind of accounting standard for this activity. In the sense that, I think, it’s very likely that until the accounting community kind of jumps in on this and says, “Here’s what meeting these requirements looks like from an accounting perspective and we’re going to standardize this.” It will be non-standard. There will be a lot of different ways that organizations define their standards, define their objectives, and then define success. And like, how are the numbers going to define success? And so, there will be a wide variance of what is “compliant.”
Juliana Neelbauer: [00:37:53] And so, I say kind of, because just by showing you made that attempt to comply and you have, you know, checked off these sort of general boxes, you may, in fact, be in compliance initially until the accounting committees kind of defines what a standard really is and says it isn’t a standard. Unless you’re meeting the standard. The kind of expanded gap for this.
Juliana Neelbauer: [00:38:16] And then the last part of this is, you have to self-assess in theory. In Georgia, you have to, as an organization, assess the benefit corp’s success or failure in meeting the objectives, in accomplishing the goals based upon the factual information. The standards applied to the standards and the objectives.
Juliana Neelbauer: [00:38:36] And so, the real swirl that I’m seeing is it says an assessment. It doesn’t say by whom. So, in theory, you can self-assess. But it’s risky legally to self-assess because we are in this gray area of what really is compliant. And until a court says you can’t do something, it sounds like you can. But who wants to go to court and be the first company to be told by a judge, “Well, actually, that’s the limit. You went too far.” You’re the one that’s now going to get your hand slapped – snapped in the cookie jar lid.
Mike Blake: [00:39:09] So that’s – having a case named after you is like having a disease named after you. You never want that to happen.
Juliana Neelbauer: [00:39:16] You know, it’s not a good look for anybody. And it’s certainly not great for marketing. I mean, there’s no way you can spin this as a good thing. Well, I guess, you know, somebody couldn’t say, “Well, we’ve now learned our lesson and we want to do it right. We want to lead the way for doing it right.” But the Georgia statute, you know, it’s clear and that there’s these four prongs, right? You have to have real objectives, not just as a namby-pamby statement of the mission. You have to have actual standards that can be quantified. And then you have to apply actual factual information to those standards. And then you have to assess at the end of the year whether you succeed or failed. Okay. Great. But what does that really mean? So to your point, it’s pretty squishy. It’s pretty squishy.
Mike Blake: [00:40:01] So, I mean, are there standards being built up? Is there something akin to a gap for B Corp so you can have some sort of objective or, at least, generally accepted measurement stick? Is there an industry of experts? Or CPA firms being asked to step into this role? How is that shaking out right now?
Juliana Neelbauer: [00:40:26] Yeah. So, yes is the short answer. And so, let’s flush that out. The power of a trade organization like B-Labs, which kind of is, I would say, like the leader out there right now. It’s the most popular one by far. And is really the one that’s put the dollars and the time in to lobby to get these state level B Corporation statute path. And to really make the movement happen within the business community. Their power is really great right now because they are defining what these terms are going to be, what these prongs are going to be for you to operate properly.
Juliana Neelbauer: [00:41:10] And then at the back end, they do certification. And so, when you hit the section that says you can do an assessment, and then, what does that mean? You go into a subsection of the statute and it says, “Well, it’s best if you make your report more frequently than annually, maybe quarterly. You really should be making it available to the public. You should use some kind of third-party standard in connection with measuring where are you going to get that.”
Juliana Neelbauer: [00:41:37] I mean, going to your question, how do I protect myself and make sure I’m doing this in a way that I can justify? Is there anybody else doing it? Can I analogize to something else? Well, they are providing all these templates to their members for how to do this. They’re assessing you. And then they’re also providing you templates for mission statements, for protocols, for creating standards. And so, you know, they have a lot of authority and control. And then, in addition, they’re getting either amendments to existing laws to make them in line with their standards that they provide. And then, also getting – in states like Georgia – they’re lobbying to get these new laws passed.
Mike Blake: [00:42:20] So this segues really very nicely then to this notion of B Corp certification. Because as I was preparing for this conversation, I learned that there are – it looks like there is a cottage industry of B Corp certification. I suppose B-Labs is kind of a leader and a vanguard for that. So, correct me if I’m wrong, it sounds like that’s what the role of a certification process is. I guess not. I understood that to kind of bless a B Corporation at the outset saying, “Okay. You’ve got the right things.” But do they also then perform trying to audit or investigation or some kind of gestation to the effect that the company is continuing to meet its B Corporation obligations?
Juliana Neelbauer: [00:43:15] Yeah. So every year, typically, you would have to – under, like the B-Lab model, you’re having to provide them effectively the same kind of information that you would be providing to a state entity, typically, or, like, the IRS if you’re a nonprofit. And so, you would provide them with those reports if you want to get re-certified. And then, they maintain your certification. And so, yeah, it’s almost as if they have privatized the regulator.
Juliana Neelbauer: [00:43:45] And the idea is that’s a good thing for you because they want you to get certified. Everyone’s incentive is to make sure that you get certified and that you’re doing this the right way. So that, as a whole, they’re creating this benefit economy and that you’re all going to be able to participate in it. And then, have on the back end the membership has its privileges. You get access to all of these other benefit organizations that ideally can make up a supply chain that is very efficient for you and potentially helps you remain compliant. Because you know your vendors are also compliant. And so, you don’t have to audit them yourself.
Mike Blake: [00:44:21] Now, let’s say that I’m listening to this so I’m thinking, “Wow.” You know, sort of hearing yourself in the head, saying, “You know, I sort of had a VA.” But instead of VA, you said you could have a B Corp. And are you familiar with or aware of scenarios where companies have converted from some other corporate form into a B Corporation? Or is that something that’s sort of exceedingly hard to get?
Juliana Neelbauer: [00:44:48] I have not personally converted an existing corporation into a benefit corporation. When that has been discussed in the past with a client or a potential client, typically, it was easier in those specific situations to just create a new entity. But there’s not – in most states that I have looked at, there’s nothing that would block you from doing that. Just like you could convert an LLC into a C Corporation in most states or even between states and maintain the same IRS EIN number.
Juliana Neelbauer: [00:45:23] So effectively, you don’t have to always close one entity. Pay the heck all of your investors their investments or, you know, pay out to your investors with the value the company is put everything up. Divide up the horses and the mules. And then, reform something which is to tax events. Right? No one ever really wants to do it if you don’t have to. There are ways to convert.
Juliana Neelbauer: [00:45:46] And there’s nothing in the Georgia statute that I’ve seen that would block that. In fact, they have a clause or two that talked about what the voting minimums would be amongst your shareholders if they were gonna take all of the existing stock and the existing organization, and have it purchased by a B Corp or convert into B Corp stock. And so, I think they’re planning for many organizations wanting to convert in Georgia from their LLC form or their corporate form.
Mike Blake: [00:46:26] Let me switch gears. And I think you’re really well qualified to answer this, because it sounds like you do a lot of advisory work on the front end of these things. What are some scenarios when, maybe, you talked somebody out of a B Corporation, right? What are some triggers or characteristics of a company or a founder or something else around the company structures who says, “You know. I appreciate you asking but a B Corporation probably isn’t the way that I would suggest that you go.” What does some of those things kind of look like?
Juliana Neelbauer: [00:47:01] Sure. I’d say any time that you’re in an industry that’s already heavily regulated, often by more than one body or by a state level and then a federal level body, that can turn your lights off with an injunction or an administrative action without you having your day in court. That type of entity, that kind of organization, and that kind of industry is one where often it’s not such a great idea. Because what you’re going to have is potentially a conflict between the responsibilities to your mission in some cases. And maybe a regulation that you didn’t even realize had been amended or were changed. Or an opinion that had come out from the regulating body that now makes your existing benefit corp mission activity in violation of your other industry regulation requirements.
Juliana Neelbauer: [00:47:54] And so, things where you’re – you know, a lot of entities that are in the health care sphere are interested in this. Because from a marketing perspective, it sounds great, right? We want to let everyone in the world know that we’re not a nonprofit. But we have a lot of the benefits of a nonprofit. And that we can act in accordance with a greater mission than just profit. But depending upon what part of the health care, or medical device, or medical services, medical research industries you’re in, it might not be a great idea. It might be better to, again, either create a separate nonprofit that can engage in the activities that you want to be able to then show the community, “Hey, we’re taking a percentage of revenue and we have approval through other means from our board to have that go towards a nonprofit that’s going to take care of those activities.” And so, that’s a typical one.
Juliana Neelbauer: [00:48:50] Another one is, if you are in a, let’s say, a business where, you know, you do very fast growth, you’re going to have to get outside capital. It’s going to have to come from an investor community that is either deeply unsophisticated but very conservative and not aware of these types of entities already. And not understanding how they function and how that can affect their investment – the value of their investment. You know, the multiples on their investment over time. Or if you’re going after investors who are professional investors and VC fund managers, who have a lot of LPs that they’re responsible to.
Juliana Neelbauer: [00:49:29] But again, it’s in a very conservative industry where there’s plentiful other investment targets that are in your same space that don’t have the same structure. Anything in that case where you’re not the vanilla option, you’re not the option that just fits their standard rubric of what they’re looking for. It might mean that you don’t get the meaning or that you do a pitch and you never get a callback or an email back.
Juliana Neelbauer: [00:49:57] And so, in those cases where it’s very competitive, you have a conservative investor pool that it’s so hard to get the meeting in the first place. To then spend half of your ten minute pitch time educating your investor community about what your form is. Boy, that can be really inefficient when you really just want to talk every second about how you’re going to change the world and make them tons of money while you do it through your business model.
Mike Blake: [00:50:25] I’m going to ask you an unfair question. And if it isn’t fair, just tell me. No reason to hold you accountable for. But I’m curious, have you ever looked into it? Have you ever heard of any studies that talk about whether or not B Corporations actually tend to perform relatively well compared to their counterparts? I read studies from time to time that talk about companies with double and triple bottom lines that seem to do pretty well. And I’m curious if you’re aware of kind of any learned information as to whether or not B Corporations tend to enjoy some kind of performance advantage or not.
Juliana Neelbauer: [00:51:06] Right. Well, Mike, you know, my undergraduate majors were science degrees. So, I’m a numbers person. I’m a research-oriented person. And so, this a question that doesn’t bother me at all. I, myself, am very interested to see what the trends are with real numbers behind them on these organizations. And whether this really is just a marketing opportunity as much as anything else. Or if there really are multiple players that can happen here as a result of choosing this specific form.
Juliana Neelbauer: [00:51:40] And I have not seen a study that I felt was statistically significant. I’ve seen white papers that replicate or try to appear like they are scientific studies. But they are, I would say, still in the marketing realm. And they’re anecdotal as far as the sample sizes that they’re looking at. And so, I think it’s early days. You know, this form has been around since 2006. We’ve had corporations in the United States that have been legally recognized since the 1600s. And of course, the corporate form goes back to the Merry Olde England, you know, even further. And LLCs have been around since mid-century of the 1900s. So, you know, these are the new kids on the block. They are so new that I don’t know that we’re going to have trend information that is really anything that you can rely upon for a while.
Juliana Neelbauer: [00:52:38] I would say we got to almost give it 40 years minimum before we know whether that’s just an overall economic trend versus some kind of benefit that this form has. That’s me. Maybe I’m a little bit too scientifically oriented in that way as far as wanting to have a big enough sample size. But I will tell you that I’m seeing objective shifts that could, in fact, create opportunities for these entities that other entities can’t capture. And anytime that you make a choice on a business level that gives you an advantage and puts you in a smaller competitive pool, that’s a good thing, right? That can only benefit you fiscally over time if you have your other fundamentals of your business operation in order.
Juliana Neelbauer: [00:53:24] And so, for example, there are grants that traditionally were only available to nonprofit organizations. That now, there is movement to open those up to benefit corps and to benefit LLCs. By definition, if you’re in a benefit LLC or benefit corp and everyone else in your industry is for-profit and they can’t access that capital. And it’s, you know, a low-cost type of capital to get a grant versus having to give out the very expensive over time, you know, buying capital with your equity or, you know, paying interest on capital that you get from other financial institutions. Boy, that’s a real advantage.
Juliana Neelbauer: [00:54:02] And I would expect that if that trend matures, where more grant organizations consider these almost like quasi nonprofits and allow them to compete for grant and major grants, then we will start to see that there’s an advantage in that realm for sure. And then, in addition, you know, B-Labs and others are not only trying to create a trade group to conglomerate and standardize what these organizations are, how they operate, how they evaluate success and performance. But they’re also trying to conglomerate investor pools that are only willing to invest in these entities. And so, if they are successful, then again, got a cartel. The moment you have a cartel, others can’t compete to get into that realm.
Juliana Neelbauer: [00:54:49] Now, there’s a whole tranche of capital out there that you can only access if you’re a benefit corp, if you’re a BLLC. Boy, that should give you some kind of advantage over time if, again, your fundamentals of your business are proper, if your market fit is proper, if your ability to execute is real.
Mike Blake: [00:55:12] Well, I’m planning on being around 40 years from now so we can check in on it, because I’m still waiting for my ticket to Mars. So, I’ll tell you what, we’ll circle back in 40 years. We’ll have another podcast. And assuming I have any more — left at all, we will come back and check and see how B Corps did.
Juliana Neelbauer: [00:55:31] That’s great. We’ll do it from Mars. How about that?
Mike Blake: [00:55:33] We’ll do it from Mars. Yeah. Well, we’ll have to be. There’ll be too much to land in the interview. So, Juliana, this has been great. And thank you for coming on. For those of you who are listening, we’re doing sort of a late-night recording here. This is late night with Decision Vision. And so, thanks for staying on and staying up so we could get you on here. This has been fantastic. I’ve learned a ton about B Corporations that I didn’t know and probably should have before I valued them. But that’s something here or there. If someone wants to ask you questions we didn’t cover, would you be willing to take a question? And how can they best contact you?
Juliana Neelbauer: [00:56:14] Sure. Yeah. So I’m happy to answer questions about these. And if I don’t know the answer already, I will track it down. I’m happy to do that. It’s education for your listeners. It’s education for me, too. I’ve heard a lot of mixed bag of questions, so hopefully I can answer most of them. The way to reach me is through my e-mail address, which I think is going to be made available through this podcast. But also, I’m online almost everywhere because with my website —
Mike Blake: [00:56:41] Yeah. It will be on the website for sure.
Juliana Neelbauer: [00:56:41] Yeah. I’m on Twitter @neelbauer and @neelbauerlaw. I think I have both of them on Twitter, two accounts. I’m on Facebook. I’m accessible via Messenger. I’m on every major messaging app, you know, that you can imagine because a lot of my clients are on all major apps. So, I’m on LinkedIn as well. And the law firm is in these places as well. So if you can’t remember my name, but you remember Drew Eckl and Farnham, either one is a great way to reach me.
Mike Blake: [00:57:12] Do you have a TikTok account?
Juliana Neelbauer: [00:57:14] I do have a TikTok account. Have I posted anything? Absolutely not. And I have removed the app from my mobile devices, even though I still have an account out either. Because the terms of service are ridiculous. And it is a backdoor for you have given up so much of your data rights when you join that thing. And then it’s extremely hackable, I think, by design. It’s almost as bad as Facebook Messenger as far as the data rights you give up. But I think they’re neck and neck for being the most atrocious online that I’ve seen.
Mike Blake: [00:57:50] All right. We will wrap that up there. A little bit of free information about TikTok. Although, I am disappointed I’m not going to get to see your post on it. But I would like to thank Juliana Neelbauer so much for joining us and sharing her expertise with us today.
Mike Blake: [00:58:03] We’ll be exploring a new topic each week. So, please tune in so that when you’re faced with your next executive decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. That helps people find us that we can help them. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.