Philanthropy Front and Center-Cleveland

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.

Listen! Nicole Hanrahan Discusses Earned Income, Community Wealth, and Social Enterprise

Nicole Hanrahan, director, Community Wealth Ventures, discusses strategies nonprofits can use to generate their own revenue based on her experience as a consultant to an array of organizations pursuing business ventures in areas of economic development, education, and other major fields. In this interview conducted by Pat Pasqual, director of the Foundation Center-Washington, DC, Ms. Hanrahan shares advice, tips, and pitfalls to avoid when beginning a nonprofit social enterprise aimed at earned income. Listen!

From The Answer Desk: What Is Social Entrepreneurship?

A:The term “social entrepreneurship” broadly encompasses ventures of nonprofits, individuals, and for-profit businesses that can yield both financial and social returns. While social entrepreneurship may be a newer addition to our vocabulary, it is not a new concept or endeavor. The Skoll Foundation provides more background on the concept of social entrepreneurship.

Social entrepreneurship may be translated into an earned income venture, such as selling goods or services, that allows a traditional 501(c)(3) nonprofit organization to diversify its funding base while providing positive impact in the community. The Free Management Librarystates that “nonprofits have to recognize that they're businesses, not just causes”. For more information on starting a business venture within your nonprofit organization, visit Fieldstone Alliance's Tools You Can Use newsletter to assess whether you have the capacity and readiness to launch such a venture.

The concept of social enterprise also applies to civic-minded individuals, businesses and other hybrid organizations that engage in for-profit ventures with a strong social bottom line. Social Edge, a program of the Skoll Foundation, is a "global online community where social entrepreneurs and other practitioners of the social benefit sector connect to network, learn, inspire and share resources."

Other web resources that address the concept of social entrepreneurship:

Idealist: What Is Social Entrepreneurship? - Summarizes the concept of social entrepreneurship from a number of different perspectives.

Institute For Social Entrepreneurs - Provides seminars and training for social enterprises around the world.

Fieldstone Alliance: Short- and Long-Term Approaches to Finding New Revenue Sources - Tips and techniques for conducting a feasibility study and market research on your target audience before launching your venture idea.

The Stanford Social Innovation Review - The Stanford Social Innovation Review offers strategies, tools and ideas for nonprofits, foundations and socially responsible businesses.

National Center on Nonprofit Enterprise - Learn here about training, planning, financing and managing nonprofit risk.

Social Venture Network provides information and convenes conferences for charities and businesses interested in operation in a socially responsible and environmentally sustainable way.

Books on the topic of social enterprise include:

• Venture Forth! The Essential Guide to Starting a Moneymaking Business in Your Nonprofit Organization by Rolfe Larson
  
• Social Entrepreneurship: A Modern Approach to Social Value Creation by Arthur C. Brooks
  
• Mission, Inc.: The Practitioners Guide to Social Enterprise by Kevin Lynch and Julius Walls, Jr.
  
• Power of Unreasonable People: How Social Entrepreneurs Create Markets that Change the Worldby John Elkington and Pamela Hartigan
  
• The World We Want: New Dimensions in Philanthropy and Social Changeby Peter H. Karoff and Janet Maddox

To locate more resources on this topic, search the Foundation Center's Catalog of Nonprofit Literature; you could start by searching on "Social entrepreneurship" in the subject field.

Have a question? Ask Us!

(This post is from Katie Artzner and Sarah Jo Neubauer, online librarians at the Foundation Center)

From The Answer Desk: What is Earned Income?

A: Simply put, earned income is revenue generated from the sale of goods, services rendered, or work performed. One nonprofit example that most people have some familiarity with is Girl Scout cookie sales. If you have ever purchased a box, you have contributed to the earned income of the Girls Scouts organization. Why is earned income gaining popularity with nonprofit organizations?  As factors like increasing competition and a flagging economy have caused gift income, like foundation grants or donations from individuals, to level off for some organizations, nonprofits are looking to diversify or expand their bases of support to meet growing needs and to better sustain their operations over the long term. New players entering the field with new ideas about how nonprofit organizations should address society's ills are also spurring increased interest in earned income and other forms of social enterprise. 

Earned income can be viewed as one part of a diversified financial or fundraising plan for nonprofits. A good primer providing background information on earned income is Social Enterprise: Hype or Reality? from the Social Enterprise Alliance, which says:

• Earned income ventures by nonprofits generally do not free a nonprofit from other types of revenue…
• Earned income ventures have never generated limitless profit…  
• Launching and running a social enterprise is as risky as launching and running a business in the for-profit sector…  
• Social enterprise demands skill sets that may be lacking in a typical nonprofit...
• Social enterprise has the added challenge of managing to the 'double bottom line' of both mission and margin…

Here are some additional resources to help you access services and get up to speed:

Web sites:

• Cleveland Community Wealth Initiative, a program of the Mandel Center for Nonprofit Organizations and Community Wealth Ventures
• The Institute for Social Entrepreneurs provides seminars, workshops and coaching services for social enterprises in the United States and around the world.
• New Directions in Fund Development, a tutorial from the Truman Heartland Community Foundation's Nonprofit Business Solutions

Books that can be borrowed from our library:

• Venture Forth 
• Mission, Inc: The Practitioners Guide to Social Enterprise

The Foundation Center also offers a full-day seminar, Earned Income: Assessing Your Nonprofit's Revenue Options. 

Do you have a question? Ask Us!

(This post is from Katie Artzner, the Foundation Center's online librarian)

Live from 'Transforming Philanthropy' - Ohio Grantmakers Forum's Annual Conference

The following 'sound bites' were heard at the opening session at Ohio Grantmakers Forum's annual conference (in Cleveland),Transforming Philanthropy, presented by Michael Lerner, president/founder of Commonweal and president of the Jenifer Altman Foundation and Barbara Smith Fund.

"I want to tell you how Ohio can change the world. It is a microcosm of the entire United States. Social innovation tends to start in the west and roll eastward. Financial innovation starts in the east and rolls westward. We are at a point in history when innovation can start right here. What would happen if all Ohio philanthropies got together and decided to focus on finding solutions to our dependence on fossil fuels, investing in clean energy and educating people to commercialize what happens at that intersection and to work in those emerging industries? Figuring this out could provide jobs for Ohioans, the nation, and the world. And the industrial and technological infrastructure already exists here to make it happen." 

"Philanthropy as a practice is at a crossroads and will be re-invented. Working with one voice can effect policy to advance a shared agenda."

"The only way for solutions to emerge is through dialogue. The truth belongs to no one and it also belongs to everyone.  Philanthropy's power to convene (a dialogue) is magnified a thousand times at a very teachable moment in history, especially as it pertains to the green economy."

***

From the economic forecast session presented by Knight Kiplinger, editor in chief, The Kiplinger Letter, Kiplinger's Personal Finance magazine and Kiplinger.com. He's also a trustee of the Kiplinger Foundation and a well-respected economic journalist and business forecaster:

"This is a humbling time for financial experts and also for economic forecasters, I might add."

"My first look-see into Cleveland was in the 1970s. I can tell you that even in this economic climate, Cleveland is a much happier place today than it was in the 70s."

"This is indeed a financial crisis, a panic, even though some assets should not be tarred with the same brush as other assets. Some sectors are booming and have been offsetting, to some degree, the problems in other sectors. Strong sectors include agriculture, technology, IT, telecommunications, health care, pharmaceuticals and medical devices, aerospace and civil aviation, defense, and heavy machinery that we sell over the world. The U.S. steel industry is going strong as are business services like accounting and law, along with the domestic sector of the energy industry."

"There are 4 major players in the U.S. economy: consumers, businesses, governments, and overseas customers.  All will be pulling back. Consumers are mired in debt. Businesses are doing ok, but are pulling back in an overly cautious mode; government spending is being cut drastically as mandates to balance budgets take effect, although the federal government will continue to spend like a drunken sailor, paying down the deficit not being as high a priority right now as spending money to get the financial systems back on track."

"More relevant than the Great Depression, for sake of comparison, are the recessions in the 1970s and early 80s when we saw 15 percent inflation and 20 percent interest rates, 10-fold increases in the costs of petroleum, and jobless rates of 9-10%. I don't predict that the jobless rate will get that high. We will have several quarters of negative GDP this year and in '09. Things will start to look up in 2010."

"Not since does not mean as bad as. During the Great Depression we had a 29% unemployment rate and GDP fell by 50% between 1929-1933. Savers and depositors were wiped out. We've had none of that this time."

"What will moderate the recession? Massive government intervention, which has already begun. Lower gas prices will help and we're already seeing a pick up in housing sales, signaling a return to reasonably priced housing, a good thing for us, our children, and grandchildren who still value the American dream of home ownership."

"I think we will see a wave of consolidations and mergers in the nonprofit sector. Foundations have valuable resources to offer in this scenario."

"I think we will see a revisiting of asset allocation policies among foundations and other large endowments, like those in higher education."

"Remember, we are in the process of returning to normal lending standards and that's a good thing. But right now, cash is king. Those with cash, like investors and businesses, will drive some tremendous bargains in the coming months and years in real estate, stocks, and elsewhere."

Watch This! Coffee and Conversation with a Grantmaker: Jennifer Thomas, Civic Innovation Lab

View the recording of our Coffee and Conversation with a Grantmaker program, presented May 30, 2008, featuring Jennifer Thomas, director of the Civic Innovation Lab, discussing how the lab supports and funds social enterprise in Greater Cleveland.