There’s a lot of talk in the NFP arts and culture worlds about this new hybrid organizational model, the L3C.
First, here is a brave attempt at a definition of it. Quoting and paraphrasing Emily Chan of the Nonprofit Law Blog,
“The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designated to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.
“A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Additionally, the fiduciary responsibilities of for-profit partners often prevent their participation in a foundation PRI in a for-profit venture. The L3C avoids this common problem through its flexible membership rules which allow partners to structure the L3C and adjust ownership to best fit their unique situations. By addressing these current investment challenges to PRIs, L3Cs are able to attract a greater influx of private capital from various sources of wealth in order to serve their charitable or education goals.”
From what I can find, the L3C has been utilized primarily so far for projects in social entrepreneurship. There’s an online article in CNN Money that describes such a project (http://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies/).
PRIs can be made in the form of loans, equity investments, bank deposits and guarantees. Like traditional grants, PRIs are used to support charitable organizations or to commercial ventures that fulfill a charitable purpose. But unlike grants, PRIs are designed to be repaid, usually along with a modest amount of interest or other type of financial return.
To be honest, the L3C leaves me scratching my head. Does it have potential use in the arts and culture sectors, or conversely does it provide an avenue for foundations to give to quasi-commercial ventures in lieu of giving to arts and culture? The two uses in the arts that I can imagine are: one, building projects in “challenged” neighborhoods where a case could be made that the gallery or theater would change the economic dynamics to the positive; and two, pre-commercial-run theatrical productions that have a chance of commercial success, but within that success gives a designated portion of its profits to a social cause. There are surely other applications for others to construct.
The hopeful aspect in the creation of the L3C is that it’s the first real diversion from the traditional 501(3)c model to come along. Its creator (s) saw a need, and rather than forcing it through the traditional model, they created a new one to move forward. Now let’s hope that other hybrids, or altogether new models are on the horizon.
I’ve heard of the L3C before, but always in passing. This post was good for the info about it. I guess I’m left wondering if investors are really going to invest in something where profit comes second. If an investor has an interest in a social good, wouldn’t they just donate to a nonprofit that attempts to remedy that? On further thinking, though, with an L3C, they could give to that mission they care about and maybe even make a little extra down the line. And if they don’t, well, they gave to something they catred about anyway.
My next thought, then, would be how this compares against fiscal sponsorship, a model that already exists, or even 501c nonprofit status. The fiscal sponsorship would seem to be less paperwork, allowing the artists to concentrate more on their art. But how much paperwork is involved with an L3C company? More than a fiscal sponsorship? Less than or comparable to a 501c?
What other, if any, advantages, does being an L3C offer? More respect from business types because it’s very similar sounding to an LLC? So it’s easier to get a loan, but harder to pay back since profit is a secondary motivation. But again, maybe that initial consideration will catch the attention of someone who is interested in your mission, as I mentioned above.
I guess I’m neutral on L3Cs until I get more information.
There are other potential applications of the L3C, and other benefits as well. A few that spring to mind:
1) Capital intensive endeavors that will serve the field and even provide a modest ROI but would have trouble attracting private funding. For example, Fractured Atlas formed an L3C subsidiary as a vehicle for the possible formation of an insurance company (we provide low-cost liability insurance to arts orgs). This business should be profitable, but will require millions of $ in start-up funds that we couldn’t otherwise raise.
2) Mission-relevant for-profit subsidiaries of tax-exempt orgs. Yes, you can form these as regular old LLCs (or S Corps, etc.), but then the profits flowing up are typically subject to UBIT. Profits coming from an L3C might be considered “related” enough to be exempt.
3) The L3C may be a vehicle for attracting new resources to the field from private investors. The cultural sector is chronically under-capitalized and under-resourced. If a foundation makes a targeted PRI in an L3C, that can be leveraged to attract far greater funds from private investors who otherwise would be completely beyond our reach.
Adam makes some good points. Points 1 and 3 were basically what I was talking about, but I really like Point 2 – very good and innovative use of the L3C model.
Has the L3C helped with the insurance project? Or is the economy too down to accurately determine the effectiveness?
@Jesus
Sorry for the delayed reply (just saw your question now).
It’s too early to say on the insurance project. We’re still laying the groundwork and haven’t begun a serious effort to raise investment dollars.
One of the cooler aspects of the L3C is that you can establish multiple investment tranches, so in theory a private foundation can “subsidize” the returns of the “regular” investors by assuming a lion’s share of the risk or accepting a smaller share of profits.
As for fiscal sponsorship… There are definitely some similarities, in that f.s. offers another “hybrid” approach. The reporting requirements for f.s. really depend on the sponsor; the IRS doesn’t have any universal guidelines. Like any LLC, the reporting/filing requirements for an L3C are pretty minimal (and much less than a 501(c)(3)).
As the primary stake holder in an llc. that is exploring options to raise funds on behalf of small local arts organizations in Philadelphia, I can speak somewhat to the frustration many of them have with the bewildering array of tax categories that they face. Many of these groups at the outset are ragtag groups of one or a few motivated artists who rely on what can compassionately be described as ” under the table” contributions. $100 from a family member, an in kind donation from a friend, or a barely disposable $50 input from their own wages from second and third jobs. Quite often, the process of becoming a standard 501(c)3 is untenable, in that the restrictions on the types of capitol allowed, the reporting requirements….even the filing fees are beyond the capacity,knowledge level and time commitment that they can invest. Any further evolution in fundraising structures ( such as the L(c)3) that open up and simplify possibilities are incredibly welcome. Looking forward to further information as it becomes available.
Have you ever considered creating an ebook or guest authoring on other websites? I have a blog centered on the same subjects you discuss and would really like to have you share some stories/information. I know my viewers would appreciate your work. If you’re even remotely interested, feel free to shoot me an e-mail.
Thank you. I would be pleased to guest author – send me details. JU