New corporate form for low-profits has a ways to go
Illinois recently adopted a law allowing companies to register as L3Cs. That makes at least six states with legislation permitting a for-profit business to become a Low-Profit, Limited Liability Company, a new corporate form for firms for whom a social mission is the primary goal.
While that’s good news, the form still faces a long road before it’s really useful, something I wrote about a few months ago. First, there’s the recession problem. L3Cs are meant to be Program-Related Investments (PRIs) that foundations can invest in under IRS rules, as long as they’re connected to the foundation’s mission. But foundations have their hands full attending to their existing grantees, without paying a lot of attention to a new type of investment. Also, the IRS acceptance of a L3C investment hasn’t officially been tested and it’s likely some foundations are afraid of a possible private letter ruling. They’ll probably be able to win their case, but who needs the hassle?
Also, my feeling is that the better horse to bet on is the attempt by B Lab and others to pass a new corporate form in California, one that would require for-profit companies that choose this status to take into account all stakeholders when making decisions. The nice feature here is that it wouldn’t apply only to low-profit enterprises as is true for the L3C.
Or, maybe the two forms are a nice complement to each other. Either way, they both have a ways to go before they’re legal and useful. I look forward to the day one, or both, are fully functioning.
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[...] New corporate form for low-profits has a ways to go (via Anne Field) – Here’s an update on the social enterprise camp’s battle for a unique “low-profit, limited liability company (L3C)” incorporation structure. [...]
[...] New corporate form for low-profits has a ways to go (via Anne Field) – Here’s an update on the social enterprise camp’s battle for a unique “low-profit, limited liability company (L3C)” incorporation structure. [...]
I’m happy to see you mentioning Program Related Investments here, they are indeed a very effective tool and what I think is the first step for foundations to making market rate investments that are alligned with their mission. Although I think we might be letting foundations off too easy by saying that they are too busy attending to their grantees to pay attention to a new type of investment. Foundations suffered huge losses in their traditional investment portfolios as a result of the financial crisis. Perhaps it’s time for them to explore these new types of investments (if they had done so before the crisis, maybe they wouldn’t have lost as much? maybe they’d have more financial resources for grant making?) For example – If a foundation’s mission is to create opportunities for the underserved in a particular area, shouldn’t the bank keep it’s cash in a community banking institution that would in turn be making loans to that community with the bank’s deposits? Just a thought…
You said “Either way, they both have a ways to go before they’re legal and useful”. I hope you’re wrong there, We’ve already formed an L3C and are working on the offering now.
A couple of points-
In your Apr. 14 2009 post you said “because L3Cs can distribute after-tax profits to its investors”
My understanding of an L3C (as well as LLC which an L3C is also) is that they are pass thru tax entities, so distributions would be untaxed or taxed as members income.
You also said “But now that the economic crisis has hit foundations hard, it’s proving to be a harder sell”. Is is there evidence of this? Having formed an L3C in Colorado (Vermont actually) I’m interested in such information. My take is that once they are understood, PRIs in L3Cs will be preferred by foundations with shrinking endowments. If the foundation makes a PRI that is mission related and provides the organizations they support with income streams or mission support, it seems like a better idea than just grants. The PRI is intended to be repaid at some point, helping to preserve the endowment. Add to this the leveraging of market investment with the PRI and it seems that this vehicle could change the face of philanthropy.
This post says “the IRS acceptance of a L3C investment hasn’t officially been tested”. I don’t see how it would be tested. There is no mechanism. Robert Lang said “We honestly believe if an L3C is used and the IRS regulations are followed there will not be an issue. No one
asks permission to drive the posted speed limit why ask the IRS if you can follow their regulations?” One of the developers of the law, Marcus Owens spent a decade as director of the Exempt Organizations Division of the Internal Revenue Service. I’m betting that he probably knows as much or more than anyone still in the IRS. Perhaps at some point there may be a disallowal of a particular PRI but I think that will not be a reflection of L3C’s or PRI’s, only of a poorly designed or fraudulent PRI’s.
The better horse? B Lab (and GIIRS) and L3C’s don’t seem to me to be an either/or. We also inserted B Lab’s language into our L3C articles and intend to get B certified. The L3C is an entity form (like C corp or LLC) with certain advantages while the B lab certification says “this is a socially responsible business”. A B Lab certified C corporation wouldn’t be able to qualify for a PRI without a PLR. There then also might arise problems with distributions.
I’m still learning about this stuff. Looking into royalties and revenue shares now. It’s is great that this is getting some notice, but I don’t understand the basis for your headline.
I agree that PRIs are a great concept and I hope they take off. The harder sell was something I learned when I interviewed Lang. About IRS acceptance–I’m sure Marcus Owens knows his stuff. But the fact is there still is the possibility that the IRS will disallow a foundation’s investing in an L3C as a PRI with a private letter ruling and that’s not a headache any foundation wants to deal with now.
About B Corp–I was talking about an effort to pass legislation in California that would create an official, new corporate status for for-profit, mission-driven companies. That’s different from getting a B Lab certification. But, as I said, it’s possible that this new corporate structure would nicely complement the L3C.