L3C and the Arts Panel
On November 16, I moderated a panel discussion in New York on the Low-Profit Limited Liability Company (L3C), and its potential for the arts. The panelists included two of the leading national experts on the business entity (Marc J. Lane and Rick Zwetch), alongside two masters from the theater world (Gregory Moser, Victoria Bailey), and one change agent from the arts business infrastructure (Adam Huttler). The video from that panel is now online, and worth a watch.
There’s been such bubbling of enthusiasm for the L3C form in the arts community (or at least in pockets of it), it was fantastic to gather such smart people and explore its purpose and potential. I came away with a deeper understanding and a greater appreciation of the full spectrum of ways we connect our businesses in the arts.
In short, the L3C is a business entity on the books in the legislation of nine states and one tribal nation. It is an entity intentionally designed to be a ‘social purpose’ enterprise…primarily focused on delivering a social outcome, even as it may or may not generate a profit along the way. The L3C was designed to receive a special type of investment from foundations, Program Related Investments (PRIs), but also seeks to gather resources from a full range of socially conscious investors.
In a world where wealth is continually seeking opportunity — to make more wealth, to make things happen, to shape the community, to solve challenging social problems — the L3C offers one more channel for wealth-holders who want both social impact and return on investment, likely at below market returns.
After the panel, I’m convinced that the L3C offers another useful tool for creative enterprise. But I think it will be used and useful in a fairly narrow range of circumstances, in which it can make a big difference. It’s a new power tool to make things happen. And we need as many tools as we can get.
Many thanks to Michael DiFonzo, the producer of the event, and to the brilliant and generous panelists who shared their time and insights with us all. Michael promises updates and next steps on the official event website, so stay tuned for more.
You ran a very good panel on a complex topic, Andrew, and this is a great summary. It will be interesting to see how this investment vehicle plays out for those who invest, however, as they will be expecting some sort of return, even if it’s under market rate. I was struck by the comment one panelist made several times thoughout the conversation – that the business plan had better be strong. If you can’t identify, even guarantee where the revenue is coming from, there will be no return on the investment, or worse – the investment will have to be written off entirely. If that happens too many times, how long will the L3C last?
Hi Verdery. Just wanted to point out that before someone can form an L3C, it must meet two requirements. 1) It must be able to generate revenue and 2) it must be formed around a charitable (social) purpose. If it does not meet both of these requirements, then you cannot form it as an L3C. Since the L3C is a for-profit structure, it is a good idea to create a business plan. When you approach potential investors, they will take you and your business more seriously if it has a business plan.
The risks that are inherent in creating an L3C are the same risks that are inherent in creating a regular LLC or any other for-profit business for that matter. The thing that makes the L3C special is that, unlike other for-profits, you don’t have to be concerned about putting profit first. The social purpose is what drives the business. Anyone who invests in the L3C does so because they support or strongly believe in its cause. Therefore, the types of investors that the L3C attracts will, theoretically, be more willing to forego profit over its ability to promote a social purpose. The beauty of the L3C is that it operates in a space where nonprofits and for-profits, by themselves, are unsustainable. As we move further into the 21st century, we are seeing a trend where for-profit corporations are looking for ways they can resolve social problems throughout the world. We are noticing how nonprofits are looking for creative ways to sustain their mission-based organizations and become more flexible and adaptable (like for-profits). The public, private and nonprofit sectors are blending into a fourth sector (social enterprise). The L3C has the potential to position itself as the business model of choice for this growing sector.
The panel was incredibly informative and inspiring. The online streaming was smooth~ (yes! tech in arts management is dispensable:D). I had a question which is related to Ms. Roosevelt’s concerns. Double/Triple bottom-line and the risk-return equation sit in the core of L3C mechanism. Although in theory L3C’s nature and its flexibility on partnerships and ownerships provide itself with a more dynamic financing mechanism, proven success of its business model and a track-reord of social return seem to be essential for investors in making initial investments. Therefore, it looks like unless you’ve already gotten the ball rolling or had engaged with some wealthy sources, it’s less possible for a start-up L3C to get funded. If that’s the case, is L3C more suitable for entrepreneurs who already have certain levels of resources and to business of which the market has been well nurtured?
Chen – Funding does seem to be a sticking point right now for the L3C. Foundations are stuck in grant mode and haven’t made the transition to providing PRIs (program-related investments) to organizations. There are foundations out there that give PRIs. However, they are few and far between. I have spoken with several arts organizations that formed L3Cs. None of them acquired PRIs to create their businesses. Most of them funded their businesses through friends and family members (which is not unlike how people fund regular LLCs). The L3C was first legalized in Vermont on April 2008. So, it has been on the books for less than five years. It’s still in its infant stage. And, although, its articles of organization contain the same wording that the IRS uses to qualify PRIs granted by foundations; the IRS still has not formally come out and “blessed” L3Cs. Until this happens, I think it will remain a slow process for foundations to start to issue PRIs to L3Cs.
However, I do believe that the L3C has an opportunity within the social enterprise sector. It needs more advocacy on the state and national level. And it needs a more focused marketing campaign.
Two points of clarification:
1. In response to Chen’s comment, start-ups aren’t disqualified. In fact, PRIs are often used for “proof of concept” or capacity building, so important for early-stage ventures.
2. In response to Bernard’s comment, it’s true that the IRS has not “blessed” the L3C. Nor has it blessed the corporation, the trust or the traditional LLC as eligible targets of program-related investing. The relevant laws are agnostic as to business form. Such “blessing” is neither in the works nor necessary to employ the form, so long as the venture meets the applicable requirements.
Thanks to Andrew for moderating the panel so effectively and for writing this terrific post — and to all for your interest and enthusiasm.
Marc