This past week I realized that I really could have used the L3C model in each of my professional leadership positions, and that in doing so, i would have alleviated pressure on the annual balance sheet. I must admit to feeling a bit “slow” when I realized this, as I have been asked countless times if the L3C has any real use in the arts and culture sector.
The realization is that I could have created any number of subsidiary entities with the L3C structure. As is typical of any large not-for-profit organization, there are numerous low-profit ideas for ventures that emerge from co-workers, board members and audience. Normally these ideas are discarded because the start-up costs outweigh any predicted profit. When these ideas are pursued, start-up costs are borne by the organization’s endowment, or annual budget, or a combination of both. The result of this is increased pressure on the annual budget, or a weakening of the organization’s capacity to deliver its mission.
With the L3C, a subsidiary organization can be formed and can seek investment from individuals, perhaps most especially board members who are already “invested” in the mission of the mother organization. If the capital needs of the venture are large, some foundations could be approached to provide PRI”s. Regardless of the mix of investments, the cash in would be all new cash, and the risk would be walled off from the mother organization. And, profits from the new venture would flow back, increasing capacity.
Perhaps also important (as I have learned from my study of entrepreneurship), the new venture, in order to attract investment, would have to produce a full business plan, one that demonstrates feasibility, potential market, etc., etc. It would require not-for-profit leaders to acquire an essential skill set (one rarely taught in coursework for developing not-for-profit leaders).
Thanks for these insights. I have also been looking at the L3C model and trying to figure out when it would make sense. A nonprofit I founded about ten years needed to establish a wholey owned for profit subsidiary. It is not a terribly painful solution but I do question it every year when I pay the additional fees and complete the necessary filings. It would be interesting to see some side by side comparision of all the related costs and benefits.
Thank you for your confident post about the L3C. I’m also studying the L3C very closely. I think non-profit arts organizations, particularly larger groups with access to capital or people with capital, could use the L3C to leverage the arts’ own well-documented economic impact for its financial benefit by creating subsidiaries that are related to arts and entertainment. Arts organizations should be able to invest in related enterprises in their downtown districts like restaurants, bars, shops, a parking garage, maybe even a hotel – businesses that people associate with going to the arts district. Without the arts as economic drivers, we know that a lot of these businesses in arts districts would go under. So why not own this space in the first place? It is interesting to me what NJPAC is doing in their commercial and residential development ventures surrounding NJPAC, sort of in that same vein. Also, don’t laugh – I think Las Vegas mega-resorts are sort of models of multiple, related ventures, all related to a united mission – entertainment – united under one mother development company. At Caesar’s Palace you have a hotel, a dozen restaurants, bars, spa, shopping mall, and several theatres (plus the casino, of course) – with profits flowing up to the mother company. Disney is another example of a mother company that owns hotels, restaurants, shopping centers, and more around its core product – theme parks – and benefits from those ventures. What if the mother company was a major orchestra? The Vegas/Disney comparisons may sound too much like apples and oranges, but like you said, it is complicated for a 501-c-3 to own a for-profit venture without diluting the mission or risking loss of nonprofit status. The L3C might be just the right vehicle for these ideas to develop.