There’s another reason to consider the L3C that’s often not discussed.
This point came up during a chat with Marc J. Lane, a Chicago lawyer and leader in the social enterprise arena. He’s giving a talk on Sept. 8 sponsored by Impact Engine, a social venture accelerator in that city, about how to choose the right legal structure for your impact business.
Lane is a leading advocate for the L3C structure (Low-profit Limited Liability Company) and in the course of discussing all the different legal structures (C Corp, LLC, nonprofit, L3C, Benefit Corp), he made an interesting point: the L3C has a benefit in terms of governance that often is given short shrift.
First, a little background.
The L3C is a structure for for-profit companies that have a social mission as their primary goal. Their notable feature is their use as so-called Program Related Investments (PRIs). What are those? To keep their tax-exempt status, foundations have to direct 5% of their assets annually to charitable purposes. We usually assume they’re doing this through grants. But they can also turn to PRIs, or investments in an entity with a charitable or educational purpose—and an L3C can serve as a PRI investment. That , in turn, conceivably could motivate other investors to take an interest. Eight states have an L3C statute and there are about 1,000 such enterprises in operation, according to Lane. (I’ve written about L3Cs before; for example, here).
Foundations have dragged their feet in trying PRIs, though, because they fear the IRS won’t approve of the move. (For added protection, they can get a private letter ruling from the IRS or an opinion of counsel). But over the last few years, more of them have been getting their feet wet. The Gates Foundation set up a $100 million PRI fund several years ago, for example.
And according to Lane, a growing number of foundations have started to make PRI investments in L3Cs. Not an avalanche. But something. “Yes, there have been PRIs made in L3Cs,” he says. The foundations tend to be smaller outfits like family foundations, where there’s less bureaucracy than in a larger enterprise. “You can sit around the kitchen table and talk about it,” he says. “You don’t have to go through layers of bureaucrats.”
So what about the governance issue? Basically, the central issue is the protection of a company’s mission. Usually, the discussion of L3Cs is about the PRI question, but, “By statute, the L3C is obligated to be mission-driven and that mission is superior to profits,” says Lane. “You have an unambiguous ordering of fiduciary priorities. The conversation is how can we continue the mission.”
On another note, Lane, who chairs an Illinois task force on social innovation, has written an amendment to the state’s L3C law to expand the L3C’s reach to include religious, scientific and literary organizations and organizations whose purpose is to prevent cruelty to children or animals, or to promote national or international amateur sports competition. It’s cleared the Senate and is pending in the House.
Of course, another option is to become a Benefit Corp. As the name suggests, in most states that have such statutes, you need to be or become a corporation to take on that structure. But it’s also a useful way to protect your mission.
Reprinted from Anne Field's August 22, 2014 editorial which appeared on Forbes.com. 2014 Forbes.com LLC™ All Rights Reserved.