As nonprofits struggle to recoup their contribution base as the economy struggles out of recession, New York has yet to authorize a hybrid business model that allows “social entrepreneurs” to widen their fundraising base.
To date, eight states have passed laws allowing for the formation of “low-profit limited liability companies,” with L3Cs restricted to a purpose analogous to those specified by the Internal Revenue Service code for 501(c)(3) nonprofits. Under existing state laws, L3Cs are allowed to convert to for-profit status if they choose.
Since Vermont became the first state to authorize the creation of L3Cs in April 2008, about 125 entities had adopted the structure as of early December, the most of any state according to interSector Partners L3C, a Longmont, Colo.-based consultancy that helps non-profits convert to the L3C model. To date, Vermont entities adopting the L3C form have included financiers, builders, and a wide range of environmental companies, including a solar farm and a budding marine research outfit.
Robert Lang, a Somers resident who pioneered the concept, says some 300 L3Cs have formed nationally, and says examples of possible applications include specialized training programs; programs to combat community deterioration or revitalize economic growth; and commercializing results of certain scientific research.
According to Americans for Community Development, which Lang founded, perhaps the primary benefit of the L3C model is its compliance with IRS regulations addressing so-called program-related investments.
PRI”™s are IRS-sanctioned investments made by foundations, often into for-profit business ventures, to support charitable activities, which may involve the potential return of capital within an established period of time. Foundations may buy ownership shares, make loans to, or otherwise financially interact with the L3C, using all or part of that portion of its assets, which would normally be given out annually as grants. Under L3C status, a foundation gets the opportunity to recover its principal investment and potentially realize a capital gain, or a portion of the income.
Americans for Community Development says beyond its benefits for widening the pool of available funding, L3Cs amount to a symbol that brands a business as one seeking a socially beneficial result.
Not all are buying into the concept, however. Doug Sauer, CEO of the New York Council of Nonprofits in Albany, called L3Cs “an exotic, legal contrivance” apt to create confusion, in a newsletter on the topic published in late November.
“Charities are working hard and continually to build the confidence of donors, organized philanthropy, consumers and the public at a time there is growing anger and distrust in the integrity of corporate and government institutions,” Sauer wrote. “Creating a so-called fourth sector that relies on blurring, legally and in brand, the historic line separating for-profit from charitable organizations is a dangerous long-term threat to the sector and public goodwill.”
Lang called Sauer”™s comments “extreme,” and it is inarguable the model is attracting significant attention in state legislators ”“ and in other venues that carry significant weight in the philanthropic community. In 2009, Yale University expanded its loan forgiveness program for indebted graduates to those that work for L3Cs, allowing alumni to apply for the program up to 10 years after their graduation.
