 The
L3C: A New Tool for Social Enterprise
By
Heather Peeler
Senior
Consultant, Community
Wealth Ventures
As the social
enterprise field evolves and grows, there is a great deal of debate on
legal and structural issues. Given the social and financial objectives
of social enterprise, many argue that existing corporate structures are
inadequate. On the one hand, tax-exempt organizations have limited
avenues to access capital, and a strong profit orientation may
jeopardize their tax status. On the other hand, corporate structures do
not satisfactorily recognize the public benefits that are the core of
social enterprise.
In an effort to find a practical solution, Robert Lang, CEO of the Mary
Elizabeth and Gordon B. Mannweiler Foundation, is leading the charge to
establish the Low-Profit Limited Liability Company (L3C).
What is the L3C?
Lang's proposed L3C, a form of Limited Liability Company (LLC), would be
a for-profit entity organized to engage in socially beneficial
activities. The traditional LLC provides a flexible ownership structure
whereby different owners of a single company can receive different
economic benefits. Lang’s proposed L3C takes the concept one step
further. The L3C’s unique structure would allow foundations to invest by
using an alternative to grants—program-related investments (PRIs). It
can have different classes of investors—such as individuals, government
agencies, nonprofits, and for-profits—with foundations taking the most
risk. The L3C’s investment structure would be designed to bring new
pools of funds such as pension and endowment investments to bear on
problems normally treatable only by nonprofit dollars.
By being a defined entity organized under state laws, the L3C would
usually eliminate legal fees and organizational costs associated with
PRIs. It would allow the use of the more efficient free enterprise
system unburdened by nonprofit regulation. Finally, its financial
structure would allow the creation of a saleable product by the
financial industry.
How would foundations benefit?
Foundations are required to pay out annually at least 5 percent of their
assets as grants to nonprofits. However, through PRIs, they could make
investments in for-profit or nonprofit ventures. A PRI can be a loan,
loan guarantee, equity purchase, or other investment that will further
the foundation’s philanthropic purposes. However, PRIs are legally
complex and expensive for foundations to administer. Only 5 percent of
all foundations have used PRIs. The L3C would have much lower
transactional costs and allow the foundation to satisfy its
philanthropic mandate and possibly generate a modest return, while
drawing additional investors to the entity.
Already in the works
Lang is already trying to establish the first L3C in North Carolina,
where the furniture manufacturing industry has been hard hit by
increased global competition. Lang is working to establish L3Cs that
would be owned by his and other foundations, individuals, and
institutional investors. The L3Cs will buy factories in the state, make
them green and up-to-date, and lease them to furniture manufacturers at
a low rate, thereby helping the manufacturers to be more competitive and
preserve jobs. The foundations would take the top tier of ownership in
the L3C and assume the greatest financial risk. The next tier might be
taken by banks, wealthy community-minded individuals, or institutions,
and the bottom tier would be a AAA investment that could be sold to
pension or endowment funds. Lang is in discussions with many large
financial institutions to enable the L3C to become a viable investment
product.
This structure could have broad applications in the housing and economic
development fields. “What we’re doing is opening up PRIs and the whole
socially beneficial sector,” explains Lang. “[The L3C] will become a
vehicle for bringing in more money to socially beneficial entities
without compromising the return.”
What are the next steps?
Lang’s efforts represent the collaboration of a multitude of individuals
and organizations, including Ashoka, the Council on Foundations, the
Kauffman Foundation, and Caplin & Drysdale, among others. Currently, the
North Carolina state legislature is considering legislation introduced
by State Senator Jim Jacumin to legalize the L3C as a form of LLC.
Feasibility studies are in the works in several other states.
Marcus Owens at Caplin & Drysdale has written a model L3C operating
agreement, and Lang has plans to publish a manual so that others can
follow in their footsteps.
“Once it gets off the ground, people will find creative uses,” says
Lang. “The L3C will allow you to reinvest in your own state, in your
community, and at a good return. It has the potential to become a
market-rate solution.”
More information on the L3C is available from
Americans for Community
Development.
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