L3Cs hold key to solving state's social woes

Monday, August 11, 2008 9:00 am
by Marc J. Lane


While state government is paralyzed by conflict and the city of Chicago faces a staggering $400-million budget shortfall, Illinois' infrastructure, education, pensions and health care are sadly neglected. But solutions to the social problems that challenge the state's ability to compete can come from outside the state Capitol and City Hall. Sometimes all government needs to do is get out of the way and let businesses and non-profits partner up.

Increasingly, non-profits are seizing market-based strategies to pursue sustainable social innovation and promote positive social change. Illinois' foundations, boasting more than $23.5 billion in assets, according to the Big Sky Institute for the Advancement of Nonprofits, can achieve their purposes 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 tax benefits when they serve the public by giving at least 5% of their assets to social programs every year - or by making socially beneficial "program-related investments" of 5% or more of their assets every year. Program-related investments further a foundation's tax-exempt activities and wouldn't be made if profit were the sole reason to invest. Therein lies the opportunity.

A "low-profit limited liability company," or L3C, is a new, hybrid business form that 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, non-profits, for-profits and even government agencies. 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.

L3Cs 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 certified "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 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. Let's urge the General Assembly and the governor to find common ground and bring L3Cs to Illinois.

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Reprinted with permission from Crain Communication Inc., Copyright 2008.

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