The L3C in my opinion is a magnificent and brilliant option. My compliments to Robert Lang and his cunning entrepreneurial acumen.

I’ve worked with a variety of non-profits. As everyone who I have ever spoken to would agree; people can help and give more if they have more. The L3C at it’s present state, is one of the most viable means to help others give more back while assisting to advance their best interest and prospective bottom line.

Best
Arthur Wood

The critical point to this is ensuring that whatever fiduciary / legal structure we have in place that the subsidy society allocates is supporting true charitable and philanthropic endeavour. The purpose not the structure is sacrosanct.

With the L3C this is codified in the relevant legislation (Both Federal and State) in that it has to conform to the relevant state and federal codes (IRS code Rule 170 and the PRI code). This is the critical issue ensuring that social mission is maintained 

As someone else noted to think of the world as just bi polar – ie for profit – bad and not for profit good – is simplistic and plain wrong also in a capital market sense and as social beings where we all have different concepts of social utility.

Recognizing that different players have different risk return parameters is what has driven LLC legislation globally (four times as many structures in the US – as normal companies) – all the L3C is doing is adding a social dimension. 

The critical question here is not one of competition with the existing status quo but the cost of capital to social endeavors. By this yard stick the current status quo is un acceptable.

With the L3C this is codified in the relevant legislation (Both Federal and State) in that it has to conform to the relevant state and federal codes (IRS code Rule 170 and the PRI code). This is the critical issue ensuring that social mission is maintained 

As someone else noted to think of the world as just bi polar – ie for profit – bad and not for profit good – is simplistic and plain wrong also in a capital market sense and as social beings where we all have different concepts of social utility.

Recognizing that different players have different risk return parameters is what has driven LLC legislation globally (four times as many structures in the US – as normal companies) – all the L3C is doing is adding a social dimension. 

The critical question here is not one of competition with the existing status quo but the cost of capital to social endeavors. By this yard stick the current status quo is un acceptable.

I summarize below the key points about L3C

The L3C is now on the statute books in the US (and applicable anywhere in the US / Internationally as a US legal entity) – the L3C -( A Low profit Limited Liability Company) has passed in a number of states – including Illinois and Michigan – as well as two first nation jurisdictions – and is before another twelve states at various stages – the Federal bill has also been written – see http://www.americansforcommunitydevelopment.org 

The lawyer who created this is the former head for ten years of the Exempt Unit of the IRS – Marc Owens. A comparable initiative is underway in the UK called the SELLP with the leading UK philanthropic Lawyer Stephen Lloyd i who wrote the CIC legislation in the UK (and sees the need for an LLC structure with social purpose) and a former Charity Commissioner. We are also supporting mirrored initiatives in Singapore and Canada. In these cases the proposal is that the safegaurds are also codified inside existing charitable law

The beauty lies in its simplicity of taking LLC legislation (four times as many LLC’s are formed in the US as straight companies) and marrying it to existing PRI regulation. In the US the whole Bill is only four pages long – even a busy politician can understand it – and bi partisan support has been maintained

At a very simple level it just makes it easy to do PRI’s – and interestingly the biggest resistance ironically has been from lawyers in this market – who suddenly discover that instead of selling a very expensive tailored meal – with a large service charge (fee) suddenly discover that clients can have a MacDonald’s! 

In this sense it is simply taking a recognised structure (used extensively in the US affordable housing) and making it accessible to many branches of the social market and codifying to the corporate world how it can engage in philanthropy – with a legally codified compliance structure already in place (again we do not end up feeding lawyers) – though this may need to be strengthened. As the greatest danger to the L3C is the non support of the current social sector and the for profit world filling this vacuum.

Practically as we all know de-layering cost reducing complexity and increasing transparency is key to growing any market. 


Structurally it can be argued there are three legal models in play (L3C being one)

1 – Public private partnerships – defined by the rules and processes of government

2 – Social Company legislation – such as the CIC – passed in the UK and the proposed (but not yet enacted in any states) B Corp and H Corp in the US – here you change the nature of the objective of the legal entity itself – with multiple stakeholders – to be social – and the definition of social mission becomes key (In the US case by adherence to the constituency rules found in 30 States). It also gets you very quickly into the metrics debate

3 – The LLC is not a singular entity – each one can be configured for different partners (Not for profits, foundations, Corporates) each taking a different social economic return for the entity – the critical point is that there is no contradiction between making profit and doing good things – its just the primary objective has to be philanthropic 

That philanthropic objective, legal case law and compliance mechanism is already codified at both State and Federal level – since this is pari passu with the PRI Legislation

It is worth looking also at its broader ramifications for each of the players:

1 – For the corporate world it says you can now engage in developing new markets creating also access to subsidy effectively changing the marginal cost of capital, opening up new markets allowing you to position brand, or address environmental concerns – the critical point is you MUST be consistent with Rule 170 of the IRS code – in terms of philanthropic mission

2 – For the Traditional Not for profit / foundation world – it gives access to these structures at cheap low unit cost (< $500 to set up)- de-layering complexity and increasing transparency - leveraging their power

3 - Allows a number of players to create systemic partnership (but ring fenced risk per deal) - with the not for profit positioned and empowered as the R&D and benefitting from into the upstream benefits and cash flow – critically with incentives and goals aligned - as opposed to being stuck in just the grant position.

4 - For the banks it has been written so it is consistent with the 1934 securities act - and ensures cheap and easy replicable structures as well as the opportunity to trade social value and create exit strategies for investors

5 - For Government brings the tax paying corporate sector into philanthropy - so it is no longer a subsidy argument but potentially revenue neutral to revenue positive - focused around the provision of services which is a cost to Government. Of course this does not preclude congress if it was so minded to then place tax credits against the structure

6 - For Governments such as Singapore, London / NY - who have hub strategies - offers the opportunity to leverage philanthropy in support of their corporate and banking hubs. As a sector we also need to move out of our national silos to address these global problems and thought needs to be given to regularizing the global philanthropic legal framework - how much quicker will that process be if the countries see philanthropic tax legislation as a source of their own global competitive advantage - ie leveraging the Philanthropic R&D? 



Attached is an article from this months Entrepreneur magazine which outlines the concept and an example deal In Montana and a another link on a recent deal done with listed entity - where Gates is behind the entity

We do not know the exact number of L3C's that have been created since this legislation was passed just over a year ago - but my guess is that there must have been over a 100.The process of course will really take off when it passes at the Federal level - and any IRS risk goes away - in any event many will be tested this year on submission to the tax returns or alternatively we find another mechanisms to reduce the risk of doing this just with State legislation 

 HYPERLINK "http://www.linkedin.com/redirect?url=http%3A%2F%2Fwww%2Eentrepreneur%2Ecom%2Ftradejournals%2Farticle%2F208056187%2Ehtml&urlhash=KoCu&_t=mbox_mebc" http://www.entrepreneur.com/tradejournals/article/208056187.html – explanation and Montana Deal from this months Entrepreneur magazine

 HYPERLINK “http://www.linkedin.com/redirect?url=http%3A%2F%2Fwww%2Eglobenewswire%2Ecom%2Fnews%2Ehtml%3Fd%3D176476&urlhash=XuRz&_t=mbox_mebc” http://www.globenewswire.com/news.html?d=176476 – NASDAQ listed deal announced this month

 HYPERLINK “http://www.linkedin.com/redirect?url=http%3A%2F%2Fwww%2Eminneapolisfed%2Eorg%2Fresearch%2Flist_by_topic%2Ecfm%3Ftid%3D14%26sid%3D2&urlhash=t8Zb&_t=mbox_mebc” http://www.minneapolisfed.org/research/list_by_topic.cfm?tid=14&sid=2 – L3C history and explanation posted last week on the Minneapolis Federal Reserve site

Happy to provide further information or to debate the issue.


Best
, Arthur Wood



You ask the question, “Why must this society sully things by seeing good only happening if it comes with a financial reward? Nonprofits do a more than admirable jobs at serving the social good. Why dilute that work by feeding America’s greed and creating an entity where mission takes a back seat to financial reward?”

In asking these questions, you presume a number of things, none of which are true. The L3C (or any other legal entity) does not require a choice between itself and non-profits. It is simply yet another way for people to participate in creating social value. Non-profits have, on the whole, done an admirable job of serving the public good and will always serve a unique role at the table. But there is room and need for more to be done. It is utter lunacy to ignore the scale and opportunity represented by the broader capital markets.

We are a generous nation, having given over $300 billion to charities in 2008. But we are a nation of capitalists as well and the total pool of profit-seeking dollars in this country was North of $56 trillion in 2008. People have a certain amount of their wealth that they are willing and capable of giving away to good causes. For some that’s 2%, for others 10% or 50%. But there is another part of their wealth that will always be profit-seeking, out of necessity if nothing else. Why on earth wouldn’t we seek and embrace new ways to leverage the vast pool of profit-seeking wealth on behalf of social good? To look at the amount of need that exists in the world and to say we are already fully serving it through the non-profit sector is to have ones eyes closed to the reality.

Finally, I would just put forth that it is a false and ignorant position to equate non-profit with good and profit with evil. Greed exists in both worlds, as do truly well-intentioned people. Non-profits are heavily regulated specifically because they are susceptible to all manner of fraud in the wrong hands. Rather than stereotype broad categories of people and businesses, why don’t we take a close look at the facts and outcomes individual entities are achieving and make a judgment about where our dollars go based on something real?

L3C is not for everyone. But the beauty of it is the ROI received by foundations (perhaps even 100% payback.) Foundations may be more encouraged to donate-this in turn also encourages corporate support. It is a way for more social entrepreneurs to become viable while attempting to do good work. There are some real incentives for investors while minimizing some of the risk.

No one for one second is minimizing the important work of nonprofits. This is an attempt to expand that good work by utilizing another vehicle. The folks helping to create this entity are generally very involved in the nonprofit world-huge supporters of what is already going on. L3C is being used to help!

Do a little more homework next time before posting…it will ultimately pay off in a more accurate blog.

Why can’t we roll up our sleeves and do the work that really needs to be done in society, rather than attack each other for any new idea that comes down the road. Frankly, I saw a lot of sweeping unsupported citizsms here, and they seemed mostly baseless. I am not surprised though; it has happened throughout the ages, Galileo was attacked and put under house arrest for purporting his new ideas contradicting the status quo.

I have never seen any monuments erected to critics. Go to my blog http://www.socialenterpriseblog.com to get a balanced view of L3Cs and then make up your own mind.

With respect to whether its wrong to try to obtain an investment rather than a donation, I think the author misses the point. Let’s use a common example to illustrate the point. Assume Foundation X believes in an organization’s mission and want to make a grant. Foundation X is limited in the grants it can make because it has a spending restriction that prohibits spending over a certain percentage of assets each year. The stock market has tanked, reducing the grant budget even further. However, Foundation X has a multi-million dollar investment budget and is willing to invest a relatively small portion of its overall endowment into a program-related investment that offers the possibility of a modest financial return. In this example, Foundation X, no matter how much it wants to help, can’t make a grant, but it can make an investment. It can’t make an equity investment in a nonprofit. There is nothing to invest in! No shares, no member units, nothing. The L3C is can be a great fit for a nonprofit with a revenue generating, mission related, activity under these circumstances.

Ultimately, I think this is much ado about nothing. The L3C legislation, as I see it, does not create any opportunities that do not exist under current law. LLCs can be written with a duel profit making and social benefit purpose today. Under the right circumstances, foundations can and do make PRI’s to traditional LLCs whose objectives prmote the foundation’s mission. The primary benefit, as I see it, is familiarizing the sector with these somewhat arcane options and increasing more foundations’ awareness and comfort level with PRIs to mission related businesses.

From my point of view, there is nothing nefarious or dangerous in the idea of the L3C — it is simply another option for organizing economic activity in support of a social purpose. As the author of the blog points out, nonprofits have to pay attention to the bottom line as well — and they do. There is really nothing about a nonprofit that makes it intrinsically superior to any other form. It has its own advantages and disadvantages. It is right for some endeavors and wrong for others.

The big difference between nonprofit and for-profit entities is that charities have historically depended primarily on tax-deductible grants and contributions to fund their activities. That, however, is changing, as more and more nonprofits seek earned revenues and engage in commercial activities. At the same time, for-profit companies, which have historically focused primarily on generating profits for their owners, are starting to behave in socially responsible ways. Cause marketing is an example of how these two worlds can and do coincide. Some people think of cause marketing as an evil because it is not “pure”, but the charities that benefit from corporate largesse are usually not among those complaining.

LLC’s can be formed for business or non-business purposes in most states. They can pursue pure profit, or support a social purpose, or both. They can be owned in whole or in part by nonprofits — in fact, I often use LLC’s for joint ventures between nonprofits and for-profits.

What people on both sides seem to ignore is that an L3C is simply an LLC that has limited purposes. It doesn’t require special legislation, and the “low-profit” designation is at this point not much more than a branding statement — it has no legal meaning, no legal force behind it, no special or different tax treatment than any other LLC. Contributions to an L3C are not tax deductible. In fact, even the claim that a L3C can receive program-related investments more easily than any other kind of entity remains nothing more than speculation. The IRS and a large number of PRI officers at foundations give the claim little credence. The promoters of L3C’s don’t like to talk about this, but it is true nonetheless.

I have generally been skeptical that the L3C offers any real value at all, and have leveled my own criticisms of it in other forums. But to say that the L3C is a threat to traditional nonprofits, or that it somehow devalues nonprofits or will direct resources away from nonprofits is misguided. There is no reason all of these different forms cannot co-exist, giving donors, investors and entrepreneurs more choice in the ways they can reach their shared objective of building a better world.