To Be or Not To Be an L3C

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November 5, 2010; Source: Asheville News/Mountain Xpress | NPQ has devoted plenty of print and online space to the emerging concept of L3C companies, the low-profit limited liability companies that have been promoted by the Council on Foundations and others as a new corporate form of social enterprise worthy of foundation support.

A half dozen states have authorized the creation of L3Cs, the latest being North Carolina. As many have acknowledged, the aim of L3Cs is to get a sort of blanket approval of eligibility for Program Related Investments (PRIs), which are loans and loan guarantees that foundations can make and that count toward foundations’ required qualified distributions or payout. (Note: Foundations can invest from their corpus in for-profit companies through Market Related Investments or MRIs, but they don’t count toward payout).

In the absence of the authority to access PRIs, what do L3Cs actually do? An artisan bread company in the western part of North Carolina called Carolina Ground has formed as an L3C under that state’s new authorizing legislation. The structure of Carolina Ground is as a “bakers’ owned co-op mill,” but it has sought and received L3C status. The founder said that the mill will “enable the farmer to get the best possible price for his/her grain at an affordable cost to the baker . . . to exist outside of the commodities market.” She calls Carolina Ground a “sort of hybrid between an LLC and a 501 C-3, in other words, it is a mission-driven for-profit business.”

Although unclear in the article, it appears that the company has received some sort of unspecified support from the North Carolina Bread Flour Project of the Carolina Farm Stewardship Association (an initiative launched with a two-year grant from the North Carolina Tobacco Trust Fund Commission and Santa Fe Tobacco). All well and good, we love artisan bread, but the purpose of the L3C per se is unclear.

Perhaps the L3C’s triple-bottom-line nomenclature enhances Carolina Ground’s ability to attract socially responsible investment, but unless somehow the IRS suddenly gives L3Cs in Vermont, Illinois, Michigan, and now North Carolina the PRI authority they want, it doesn’t seem like Carolina Ground will be quickly accessing the PRIs available from North Carolina’s well-respected and innovative philanthropic sector.—Rick Cohen

  • Lori McGlinchey
  • Jennifer Chesworth

    If you find the article confusing it’s because the need for an L3C business model is confusing. If the IRS does change the rules, we’ll see the BCorps wanting that access too, and likely deserving it more. An L3C is “a mission-driven for profit business?” You mean like a dentist or a plumber? both providing social services that improve the quality of life…
    Try comparing the L3C to the BCorp and the model is not just redundant, it falls short.

  • rick cohen

    Hi Jennifer: I agree that the L3C concept is of concern. Lucy Bernholz and I had an online discussion through her blog on what L3Cs, B-Corps, and other new forms like those meant for nonprofits as they try to access tax exempt resources. They are worth watching, not only for what they do in terms of delivering social benefit, but what impact they have on the tax exempt nonprofit sector. Thanks for your comment.

  • Robert Lang

    I am constantly amazed by the number of people who make negative comments about the L3C who seem to have never tried to get the facts straight. First for lots of correct information go to http://americansforcommunitydevelopment.org/

    Second I created the L3C and I never suggested “…the aim of L3Cs is to get a sort of blanket approval of eligibility for Program Related Investments…” This makes no sense. It would destroy IRS oversight. And in fact if Rick had checked he would have found that the laws and regs regarding PRIs will not even allow the IRS to give blanket approval. What I did suggest and others who work with me suggest is that the branding, the templating, and the experience gained from organizing many similar structures will substantially lower transaction costs and because of brand recognition make understanding L3Cs much easier. A brand is like a picture. It is worth a thousand words.

    In fact a recent survey of all L3Cs formed in Vermont showed that many people are organizing them just for the brand and have no immediate plans to seek PRI financing. In the for profit world it is common for people to form businesses, start up, and figure it out as they go. What has always been lacking in the social sector is the ability to do the same thing. It usually costs legal fees to become a nonprofit given that the IRS filing is not a walk in the park. That filing also requires that the organizers lay out a fairly clear road map of what they intend to do. The L3C gives social entrepreneurs the opportunity to start a business and figure it out as they go before they even look for foundation financing.

    The organizers of Carolina Ground are on solid ground. They are increasing opportunities for farmers to grow more profitable crops, helping small bakers in depressed areas, helping to preserve healthy and more sustainable agriculture, and preserving the art of artisan bread making. If Rick Cohen had read the IRS regulations on PRIs he would find that Carolina Ground complies. For another agricultural L3C see MOOMilk http://moomilkco.com/

    It is interesting that Rick and Lucy Bernholz had this online discussion about L3Cs. Lucy led a panel last month at the IS convention that included L3Cs. When I found out it was going to happen I called her to offer my services since I was going to be at the convention. If you are discussing a topic why not have the creator there? Lucy never even had the courtesy to return my phone call.

    Just to set the record straight even more, the L3C has been approved in 8 states and two Indian Nations. But if Rick had check the ACD website before writing this he would have known that.

    New ideas take time to mature and grow. It has only been two and a half years since the first state passed the law. Every week people from even more states ask for us to write a law for them. We must be doing something right.

    In the early 1900’s some locales passed laws that a flag man had to precede one of those new and dangerous horseless carriages to warn all of the menace approaching. Just think what modern transportation would look like if these naysayers had prevailed. It is easy to reject progress, much harder to roll up your sleeves and make a positive contribution. I have created a life for naysayers. Maybe you should all send me royalties.

  • Gene Takagi

    I’m appreciative of Bob’s work with the L3C, and he’s been generous in sharing information with me. But of course there are legitimate concerns with the L3C, and they should be welcome and raised in various forums. And we need to hear many voices, not just a few, and sometimes it’s better to have more objective opinions without the inherent bias that any “creator” would naturally have.

    The L3C has amazing potential. But is the “brand recognition” sufficient to meet its potential without federal legislation? How will the L3C compete with charities for limited philanthropic funds, and what impact will that have on the charitable sector? Should we just assume that the competition will result in more social good, or could it result in fewer resources ultimately being spent on charitable purposes? Should Attorneys General regulate assets that are held for “charitable or educational” purposes under the charitable trust doctrine? If not, why not? And if AG’s should regulate L3Cs, who pays for this? What steps will L3Cs take to self-regulate and prevent abuses?

    Lots of questions and discussions should be encouraged. L3C Connect on LinkedIn may be a helpful resource for those who are interested (but it may take some searching to find the most relevant materials).

    Cheers!

  • Rikki Abzug

    Just wanted to let everyone know that I will be presenting, at the upcoming ARNOVA meetings, an empirical study comparing characteristics of the first 95 L3Cs in Vermont with a sample of 100 Vermont nonprofits that were founded at the same time. I’m looking forward to a lively discussion.

  • Robert Lang

    Gene, I appreciate your support and comments and I obviously did not make myself clear. I welcome even negative comments if they advance the space. I do not have all the answers and never did, but I do resent people who make comments without at least getting the record straight. If we start with undisputed facts it is easier to look at all the positives and negatives.

    The comment you made on federal legislation is one that is made often. However, it reflects a lack of understanding as to how Congress works. Congress and the federal government in general do not lead they follow. Congress reacts to the demands and needs of the people and many members of Congress have, for good reason, become cynical. They tend to look at requests for legislation through a personal political lens – how will affect my career and what is in it for me politically. While this may sound very bad I have come to realize that without this approach Congress would function very poorly.My point is that Congress will pass a federal bill when they sense the demand not because they think it is a good idea. We are going to try with a slightly different version of our federal bill in the next month. It should be on the ACD website in the next day or two. For those of you who want to help push it through check the ACD site often. As soon as we have a bill number we will post it and you can write your representatives.

    I absolutely push back on the idea that the States Attorneys General should have any regulatory powers over L3Cs. L3Cs do not have Charitable dollar operational subsides. They are subsidized by reduced cost capital investment. As I stated above many formed without foundation dollars. If they have no foundation dollars then there is no reason for the AGs to pay any attention. If they do have foundation investment then the AGs and the IRS should be looking to the foundations who are charged by law with monitoring their PRIs. There is no reason for an extra layer of oversight on L3Cs anymore than there is reason for the AGs to look at any for profit that has a PRI investment. Does anyone think a major drug company that got a PRI from Gates to develop a particular drug would even participate if the AG was even involved?

    The old saw that L3Cs might take funds otherwise destined for nonprofits misses the mark on two counts. The first is that there is NO law or regulation saying that foundations should give their money to nonprofits.In fact quite the opposite is true. I think a substantial case can be made that foundations have a fiduciary responsibility to maximize the benefits derived from their grants and PRIs. If an L3C can accomplish more with fewer foundation dollars then they deserve the investment. Of course since L3Cs are designed to bring for profit dollars to bear on the social issues then it stands to reason that the actual pot of money available for social issues will increase not decrease with L3cs and the nonprofits will actually have less competition for the dollars. Incidentally nonprofits compete with each other for charitable dollars.

    Rikki, I was glad to see you on this forum. It is a little known fact that Rikki was a very early contributor to the L3C. Back when I was still formulating the idea I bounced ideas off her and her help was invaluable. I could not have shaped it into a coherent concept without Rikki.

    Rikki,have you seen Betsy Schmidt’s paper on the Vermont L3Cs? If you want a copy get in touch with me at:

    Bob Lang, CEO
    L3C Advisors L3C
    914

  • Rikki Abzug

    I came across Betsy’s paper on the Intersector website–very interesting. Her sample and my population study (not surprisingly) uncover very similar findings about the characteristics of these organizations so far. What I add is the comparison with nonprofits which I found very illuminating. A draft of my paper should be going up on the ARNOVA conference website any day now. Meanwhile, it’s quite fun for me to be following up on what was once (and not too long ago) just a glimmer in Bob’s eye :> Looking forward to following the activity from a researcher’s perspective!

  • Jennifer Chesworth

    To me, the problem with “brand recognition” as the key benefit of this model is that it potentially represents yet another example of “jamming the airways” in regard to public understanding of what social entrepreneurship really is. This is not to say that new ideas are unnecessary and shouldn’t be explored. It reminds me, however, of how the organic and fair trade movements seem to be splintered by multiple attempts to capture the niche, with companies attempting to manipulate words like “natural” and “sustainable” and other frankly green-washing labels along with the myriad of legitimate efforts. Many of us have wondered for years why the “alternative” agriculture and food product community does not just remain rallying together under the banner of organic certification, working together to shape it, strengthen it, and promote it locally, nationally, and internationally. Sometimes having more brand options confuses the public more than anything else, which works against change as a cohesive movement.

  • Sally Duros

    Good to see this discussion here. I just wanted to chime in with one point on the value of brand recognition. At a meeting of 100 or so foundations that make PRIs last year, conversation about the L3C proved illuminating for the foundation officers in attendance at the crowded session. PRI Makers are interested in hearing about any tools that can move their work into the realm of a sustainable cycle. They’d like to see real progress. It seemed a few light bulbs went off in the room when the foundation officers in attendance realized that the L3C cold be a useful branding tool for social entrepreneurs to state their intention. I hope to write more about this soon.

  • Caryn Capriccioso

    I agree 100% with Sally–in my experience, foundations are very interested in learning how they can make inroads into this social purpose business space. The L3C is of interest to them as an option for broadening their efforts around social change through partnerships with market-responsible entities. It’s a quickly evolving conversation; one worth watching; it’s certainly never dull.

    Beyond foundations, the buzz and energy around alternative business structures is extremely high. At the recent Net Impact national conference, more conference goers (primarily 20-something MBA students) attended the session on alternative business structures than a concurrent session with CSR leaders from McDonalds, GE, Intel and Symantec. Our next generation of leaders accepts social purpose business as a norm, not an exception, and doesn’t see it as an add-on to a business, but as central to the core of business.

    Soon, the “controversy” over L3Cs will die down as it gains wider acceptance and its successes can be further documented. On that note, Rikki, I look forward to learning more about your study. It sounds fascinating, and it’s great to know that you were involved with Bob in the early days as he developed this concept!

  • Dejiridoo

    I’ve been very excited to learn about the development of the L3C. As a lawyer who works in nonprofits (and now philanthropy), I have often been discouraged by the lack of incentive structures beyond purely personal reasons for achivement. Sure, there is status and satisfaction, but at the end of a long day, sometimes it’s not enough.

    L3C drives at the heart of these issues. Much work clearly remains to be done, but I’m excited by these discussions and I think a little spirited debate will help the L3C become better. I think Bob Lang is write to challenge the ‘tensions’ identified by Gene Takagi, although I’m sure there will inevitably be some. Lang correctly dismantles the typically rhetorical device of scaring people about a finite pot of resources, when the pot may not be rigid at all. For my part, as someone new to these issues, I don’t quite see L3Cs as being opposed to B-corps, or even competing for the same space. My sense is that L3Cs would harness the power of PRIs, and this is integral to the model, while B-corps would promote improved stakeholder governance.

    With respect to branding, I’m surprised at the extent to which B-corp has gained recognition. Anyone from an American school system (and this is an American legal structure) knows that B’s are second best. It’s totally bizarre to me that they selected this brand, but I chalk it up to naivete. Who knows, maybe they can come up with a good marketing campaign and make it stick.

    Thanks again for an illuminating discussion.

  • Jennifer Chesworth

    Really good point about the branding of “BCorp” conjuring a bit of association with being second-rate. However, the thought never occurred to me before now, and as you note, it has gained recognition, especially among business people and the young entrepreneurs. So they’re doing something right in regard to marketing — it may not be naivete so much as maturity that’s gaining ground here, people aren’t judging it based on schoolday notions, it would be a shame if they started.

  • Rick Zwetsch

    I think the B Labs folks are doing great work. I also think they have or will have some (more) issues with the names of both the certification (B Corp) and legal structure (Benefit Corporation). They’re both “okay”. Not convinced either is right. I also don’t think “low profit limited liability company” is right for the L3C. I don’t tell anyone that’s what it is or is supposed to be or stands for or…unless I absolutely have to. And remember…we are one.

    That being said, the “community” the B Labs folks have built in a relatively short period of time is 1) a great model and 2) a model that can and should be emulated. I hope the L3C gets there too. Soon. REALLY SOON!

  • M. Leslie

    Where can I find a copy of your empirical study, Rikki?