A few months ago I was giving a presentation to a group of entrepreneurs, and one of the participants was someone trying to raise awareness in Iowa about “B-corporations.”
I had never heard of a B-corp before, so I had to do some digging.
First of all, Iowa currently does not have B-corporations. Second of all, the whole “B-corp” reference is a term relating to state law, not to tax law.
This post will answer two questions: what is a B-corp, and how are they taxed.
What is a B-Corporation
A “B-corp” refers to a “benefit corporation.” Here’s how Wikipedia defines the term:
(A) benefit corporation is a type of for-profit corporate entity, authorized by 30 U.S. states and the District of Columbia that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals. Benefit corporations differ from traditional C corporations in purpose, accountability, and transparency, but not in taxation.
The last phrase in that quote answers the next question:
How Are B-Corporations Taxed?
There is no tax distinction to being a B-corp. As I’ve written about before, all corporations are taxed as C-corporations by default, but they can elect to be taxed as S-corps. The “C” and the “S” are tax terms.
So, a B-corporation can elect to be taxed as a C-corp or an S-corp, same as any other corporation.
Confused by the Alphabet Soup?
These terms can get confusing. Here’s the basic way of looking at it:
- “B-corp” is a term that has meaning for legal purposes at the state level (in the 30 states that recognize B-corps). It is a legal term, not a tax term.
- C-corp is a tax term referring to Subchapter C of the Internal Revenue Code. The term “C-corp” is meaningless when it comes to state legalities.
- S-corp is a tax term referring to Subchapter S of the Internal Revenue Code. The term “S-corp” is meaningless when it comes to state legalities.
Hopefully this helps define the terms and make things a little clearer.