2008 Lane Reports

L3Cs Hold Key to Solving State's Social Woes

Monday, September 1, 2008 6:00 am
by Marc J. Lane



While the State of Illinois' government is paralyzed by conflict and the City of Chicago faces a staggering $420-million budget shortfall, Illinois' infrastructure, education, pensions and health care are sadly neglected.  But the social problems that challenge the state's ability to compete and sabotage its people's dreams can often find solutions outside the Capitol and City Hall.  Sometimes all government needs to do is get out of the way and let businesses and nonprofits partner up.

Increasingly, nonprofits are seizing the power of market-based strategies to pursue sustainable social innovation and promote positive social change.  And Illinois' foundations, boasting more than $23.5 billion in assets according to the Big Sky Institute for the Advancement of Nonprofits, a Montana-based philanthropic advocacy organization, can fully achieve their purpose only when they are energetic agents of change, and not mere benefactors.

Their best opportunity is hidden in plain view in the Internal Revenue Code.  Foundations earn their tax benefits when they serve the public by distributing at least five percent of their assets to social programs every year - or by making socially beneficial "program-related investments" of five percent or more of their assets every year.  Program-related investments are those that further a foundation's tax-exempt activities and wouldn't have been made if profit were the sole reason to invest.  And therein lies the opportunity.

A "low-profit limited liability company" (L3C) is a new, hybrid business form which can leverage foundations' program-related investments to access trillions of dollars of market-driven capital for ventures with modest financial prospects, but the possibility of major social impact. 

An L3C can have different classes of investors - - individuals, nonprofits, for-profits, and even government agencies.  But foundations, primarily seeking social payoffs, take the lion's share of economic risk yet content themselves with below-market financial returns.  No wonder for-profit investors, seeing the risk-reward tradeoff shifted dramatically in their favor, eagerly commit their capital and expertise to investments they would otherwise reject out of hand.

Teaming up, L3C's investors can offer low-interest loans to needy students, finance low-income housing projects, provide credit to disadvantaged business owners, combat community deterioration, and help alleviate other social strains.  Imagine the win-win outcome if an L3C were to buy an abandoned Chicago factory, rehab it as a LEED (Leadership on Energy and Environment Design) green building, and lease it at below-market rates to an ambitious, but cash-strapped manufacturer.  The entrepreneur could become a successful employer and a catalyst for sustainable urban development.

So far, only Vermont charters L3Cs, but authorizing legislation is in the works in Georgia, Michigan, Montana and North Carolina.  Every other state, including Illinois, is constitutionally required to recognize L3Cs in whatever state they may be organized.  Still, Illinois should champion innovation, social entrepreneurship and self-reliance, and empower those who would drive the social progress we demand.  Despite their differences, let's urge the General Assembly and the Governor to find common ground and bring L3Cs to Illinois.

Reprinted with permission from Crain Communication Inc., Copyright 2008 

Marc J. Lane (mlane@marcjlane.com) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2008 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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