Nonprofit Newswire | Are L3Cs Essential to the Future of Social Enterprise?

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August 25, 2010; Source: Social Enterprise | Social Enterprise blogger Harry Stevens has issued a three-part defense and promotion of low-profit limited-liability corporations (L3Cs), the “hybrid” corporate model that some social entrepreneurs believe will be the next giant leap to meld social values and profit motivations to achieve what nonprofits and for-profits might not or cannot achieve on their own.

In the first part of his L3C promotional, Stevens notes in the title that L3Cs will “challenge grantmaking” in the U.S., but his analysis isn’t really about grantmaking at all. It is about the hoped-for ability of L3Cs to “automatically qualify for [private foundation] PRI’s (program related investments) under the IRS code” so that foundations can make PRI’s to for-profit L3Cs without having to seek special permission or fear reprisal from the IRS.

Prequalifying L3Cs as automatically eligible for PRIs (which are loans and loan guarantees, not grants) requires legislation. Stevens offers six reasons why L3Cs should be considered “essential” to the future of social enterprise and therefore merit this special consideration:

  1. L3Cs could be a recognizable “brand” for social enterprises, putting definition and regularity to a chaotic field of multiple kinds of social entrepreneurs;
  2. L3Cs could become a structure that would permit social enterprises to acquire capital from multiple investors, that is, “tranches” of social and market investment;
  3. They constitute an easy-to-understand and easy-to-use legal framework for social enterprises;
  4. The L3C is a corporate tax structure that, according to Stevens, is “appropriate” to hybrid companies;
  5. Given their legal status and definition, L3Cs would ensure that “social enterprises stay true to their mission;” and
  6. Now is the time for L3Cs, presumably because of the convergence of an economy in need of new sources of capital and a nonprofit sector increasingly interested in hybrid business-oriented models.

These are all interesting and persuasive arguments, but we think that for most L3C proponents, it’s about the money—the access to the underutilized font of foundation PRIs. Some L3C advocates have even begun to acknowledge as much, as we have noted here at NPQ.

The capital motivation is obvious in several groups, such as Community Records in Ypsilanti, Mich., which started as a for-profit in 2006, became a nonprofit in 2008, and finally recreated itself as an L3C in its search for financial support. In contrast to an L3C encomium like this one from Social Enterprise, there is increasing pushback against L3Cs, including a piece from a Kentucky regulator in the February 2010 Exempt Organization Tax Review and a trenchant analysis by William Mitchell College of Law professor Daniel S. Kleinberger in the summer issue of our own Nonprofit Quarterly.—Rick Cohen