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New corporate structure could give social entrepreneurs new funding stream

New corporate category could aid fundraising for low-profit companies
Monday, August 10, 2009
by Ann Meyer

New corporate structure could give social entrepreneurs new funding stream
New corporate category could aid fundraising for low-profit companies

Ann Meyer

August 10, 2009

After nearly four decades of running a staffing agency on a shoestring budget, John Plunkett hopes the next business he starts will be a moneymaker thanks to a new law that recognizes for-profit businesses with a strong social bent.

The law, signed by Gov. Pat Quinn last week, allows the incorporation of low-profit, limited-liability companies, or L3Cs, a new hybrid structure for for-profit ventures that have a primary goal of achieving a socially beneficial purpose.

"One of the problems we've had for four decades is operating with enough capital to do what needs to be done to grow and thrive as a business," said Plunkett, founder and chief executive of Harborquest Inc., a Chicago non-profit staffing firm that aims to move disadvantaged workers into better jobs.

While the charity, which has an annual budget of about $5 million and employs 20 staffers, competes with for-profit staffing firms, it has struggled to come up with working capital to fund its growth because most of the grants it receives are designated for programming expenses only, Plunkett said.

By launching an L3C with a similar social purpose, Plunkett would be able to offer investors a financial return.

"It's a means of bringing more investment to the table," he said. "This might offer real growth possibility."

The law, which takes effect Jan. 1, aims to make it easier for social enterprises to attract capital, said Sen. Heather Steans (D-Chicago), who sponsored the bill.

"Foundations have a growing interest to not only make grants that achieve a social purpose but also use investments to do that," Steans said.

Chicago attorney and financial adviser Marc Lane of Marc J. Lane Wealth Group, who helped spearhead the Illinois legislation, said the L3C law could create new jobs by supporting social enterprises that otherwise couldn't exist. It's particularly timely given the credit crunch, he said.

"This new form will leverage foundations' program-related investments to attract private capital for the benefit of all of us," said Lane, who also is president of the Chicago Chapter of the Social Enterprise Alliance.

Illinois is among the first states to pass an L3C law. Vermont passed the first law on April 30, 2008, and now lists about 60 L3Cs in the state database, including a chess camp, theater, alternative energy companies, publishers, food companies and numerous consulting firms.

The L3C is the brainchild of Robert Lang, CEO of the Mannweiler Foundation in Cross River, N.Y., who wanted to make it easier for foundations to invest in for-profits with a social mission. While foundations are allowed to make program-related investments in for-profits, only about 5 percent do because of the red tape involved, said Lang, who is also chief executive of L3C Advisors L3C.

While many L3Cs have purposes similar to non-profits, they can distribute their profits to shareholders, a major distinction. By law, L3Cs are called "low-profit" companies, because profit is a secondary goal.

Still, "there is no profit ceiling," said attorney Marcus Owens, a partner at Caplin & Drysdale in Washington, D.C., who is working with L3C Advisors to establish a branded definition of L3Cs and uniformity in laws from one state to the next. L3C Advisors also is pushing for federal legislation.

L3Cs pay taxes on income as all LLCs do, and contributions to L3Cs are not tax-deductible as they would be for a charity. However, foundation investments count toward their required 5 percent endowment payout each year, Lang said. L3Cs allow for multiple stakeholders with different terms. For example, foundations might settle for a lower financial return on their investment than private-equity investors.

Social entrepreneur Mike Melillo of Watchung, N.J., hopes to secure foundation funds for his social media company by converting the LLC to an L3C. He launched SocialChord, which provides local online communities, with the intention of bringing in investors. Despite two years of trying, Melillo hasn't nabbed the capital he was counting on.

Without the L3C structure to potentially open a new funding stream, Melillo said, "at this point, I'd probably just fold."

Jennifer Towery, president of the Peoria Newspaper Guild, would like to see the L3C structure applied to newspapers because "you have to fulfill the social mission before you can make a profit," she said. She envisions multiple stakeholders committed to improving a newspaper instead of boosting margins.

"Any newspaper could be a better newspaper than it already is," she said.

Supporters say Illinois' L3C law is coming at a good time. While federal stimulus funds are making their way through the economy now, they won't last forever, Plunkett said.

In the future, he said, "it will be up to the marketplace to take up the slack."

L3C facts

--An L3C must have a socially beneficial purpose.

--It's designed to let foundations make program-related investments more easily.

--Investors can earn a return and hold equity in the company.

--L3Cs are not tax-exempt, and contributions to L3Cs are not tax-deductible.

--Other states that have passed L3C laws: Vermont, Michigan, Wyoming, Utah, North Dakota.

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