Have You Heard About the L3C Nonprofit / For-profit Hybrid?

(This post is from Sandy Pon, virtual library/learning center specialist, Foundation Center)

While reading one of the many newsletters I get in my inbox, a recent BusinessWeek article, "Turning Nonprofits to For-Profits", caught my eye. (Thanks to Council on Foundations' news digest for this news item.)

It was about low-profit limited liability companies, or L3Cs, a form of social enterprise that puts mission first and profits second. "The L3C is a new form of limited liability company which combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit. It is the for-profit with a nonprofit soul," according to Americans for Community Development, which is working with legislators across the country to enact the legal framework necessary to permit the formation of the L3C.

Nonprofit Law Blog provides a good overview and definition:

The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.

A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations can only directly invest in for-profit ventures qualified as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether they would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to verify that the venture is a valid PRI. An L3C’s operating agreement minimizes this problem by specifically outlining its respective PRI-qualified purpose in being formed, making it easier for foundations to identify social-purpose businesses as well as helping to ensure that their tax-exemptions remain secure.

Americans for Community Development further argues the advantages of an L3C:

[The L3C] also facilitates tranched investing with the PRI usually taking first risk position thereby taking much of the risk out of the venture for other investors in lower tranches. The rest of the investment levels or tranches become more attractive to commercial investment by improving the credit rating and thereby lowering the cost of capital. It is particularly favorable to equity investment. Because the foundations take the highest risk at little or no return, it essentially turns the venture capital model on its head and gives many social enterprises a low enough cost of capital that they are able to be self sustainable.

First and foremost, the L3C is a for-profit organization, so it would have to pay taxes on its profits, and it can't receive traditional grants or tax-deductible charitable contributions, like 501(c)(3) public charities can. The L3C has not been legalized in every state yet, but it's now considered a legal structure in Vermont, Michigan, Utah, and Wyoming, and legislation is pending in several other states. In fact, the Council on Foundations supports federal legislation [PDF] that would encourage foundations to make program-related investments (PRIs) to L3Cs through an expedited review process by the IRS.

Regulations for limited-liability companies vary from state to state, but L3Cs formed in these states can be used in other states. Would-be L3Cs should choose the state with an L3C designation whose LLC law is most compatible with their home state's LLC law, according to Robert Lang, CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation and creator of the L3C concept.

There are 53 L3Cs in Vermont and a handful in other states so far. Some examples of L3C entities that have been created are:

* Monkton Community Coffeehouse, a multi-use community gathering place in an historical building
* Cool Pass, a carbon offsetter program that assists low-income homeowners with obtaining EnergyStar efficient furnaces, hot water heaters, insulation and other home upgrades
* Faithful Travelers, a travel service that matches faith-based customers with service-based excursions

Other examples are in carbon trading, alternative energy, food bank processing, social services, social benefit consulting and media, arts funding, job creation programs, economic development, housing for low income and aging populations, medical facilities, environmental remediation, and medical research.

As more L3Cs form, will foundations start giving more PRIs and fewer grants since they can get the money back, plus some interest? Charity regulators have asked the same question, along with many others. It's probably too early to tell if grantmakers will shift their giving strategies. However, you can see early responses to the charity regulators' questions [PDF], prepared by attorneys working with Mr. Lang. (One of the attorneys is Marcus Owens, who worked in the IRS's Exempt Organizations Division for 25 years, 10 of those as its director.)

To learn more about the L3C, please consult the resources below:

The L3C: Low-Profit Limited Liability Company Research Brief | Community Wealth Ventures [PDF]
Includes definition; candidates for L3C designation; current activities; implications for foundations; additional resources. Published July 2008.

Low-Profit Limited Liability Company | Vermont Secretary of State Corporations Division
One state's legal treatment of L3Cs. Vermont was the first state to adopt L3Cs in April 2008.

L3C Connect Group | LinkedIn
Intended to provide a vehicle for all stakeholders in this arena to share best practices, make professional connections and to share ideas. Requires registration as a LinkedIn user.

What do you think about this new form of social enterprise? Tell us.

Comments

[Cindy Bailie]

Here's a recent post (9/9/09) from Robert Lang at the Life & Wealth balance blog on L3Cs (originally posted at LinkedIn), http://richiericher.wordpress.com/2009/09/09/more-on-l3cs-written-by-robert-lang/

[Sandy Pon]

If you're intrigued by L3Cs, our Atlanta office will have a nuts & bolts program on L3Cs on Sept. 16. A video of it will be posted on the Center's site afterward. Here's the class detail: http://foundationcenter.org/atlanta/training/l3cat.html

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