The New Double Bottom Line
The L3C designation is helping entrepreneurs start for-profit businesses with non-profit souls.
As an entrepreneur, you've certainly heeded the call of passion for your work. Maybe you even subscribe to Marsha Sinetar's sage chestnut, "Do what you love, and the money will follow." But until a few years ago, there was a distinct difference between starting a business with an eye toward the bottom line and taking the same plunge for social good. Then along came the L3C.
Often called "the for-profit with a nonprofit soul" by Robert Lang, one of the architects of the business structure, an L3C is a hybrid model that allows owners to do well by doing good. The bonus? L3Cs can get funding from sources that have traditionally been hard to tap--such as foundations.
What It Is
The L3C, just like the LLC, is a for-profit business structure. Rick Zwetsch, principal partner with interSector Partners--the first L3C in Colorado--notes that the reason you may not have heard of L3Cs is because legislation for them has only been signed into law in Vermont, Michigan, Wyoming, Utah and Illinois, as well as the Crow Indian Nation and the Oglala Sioux Tribe. However, L3Cs are recognized in all 50 states, and there are just over 100 of them up and running right now. So, no matter where your business is located, you can form an L3C, "Just as you can form a Delaware corporation and do business in Idaho, Colorado, North Carolina or any state in the U.S.," Zwetsch explains.
Ranging from an organic milk company in Maine to consulting firms in Colorado, the L3C's main goal is to provide social benefit. Despite this do-good aspect, the business owner must pay taxes. And Zwetsch adds, "While some call it a 'low profit' limited liability company, you'll need to earn and retain profit to sustain your business over the long term."
How to Organize an L3C
Though the process of organizing an L3C is relatively simple, Zwetsch advises those interested in forming an L3C to seek legal counsel to get it right. Elizabeth Minnigh, an associate with Buchanan Ingersoll & Rooney, points out that currently there are no L3C specialists because the format is relatively new. "However, it will probably be most cost-effective to use someone with some familiarity with the L3C structure," she says, adding that resources--including sample operating agreements that can advise an attorney how to proceed--are available online at the Americans for Community Development website.
Zwetsch says factors such as the initial and projected number of organizing members and/or managers, growth, and the projected need for capital over time will determine how complicated the organization of the L3C will be.
The cost of organizing itself is relatively low, according to Zwetsch. "interSector Partners filed Articles of Organization with the Vermont Secretary of State and paid a $100 fee." Zwetsch says interSector Partners then had to register as a foreign entity doing business in its home state of Colorado. "It's a simple three-page form and a $125 fee."
Raising funds is where the L3C has an edge, particularly during economically trying times, when banks are reluctant to loan and angel investors have flown the coop. By becoming an L3C, a business is better positioned to receive a mix of investments from both traditional sources and nonprofit foundations. The latter source of funding is especially compelling because foundations must make Program Related Investments (PRIs) annually to the tune of at least five percent of their assets in order to keep their tax-exempt status.
It's a win-win because all too often, foundations make grants with no financial return just to meet the deadline. A PRI that generates even a modest return can be beneficial to both the nonprofit foundation and the L3C. It also saves some of the IRS scrutiny because L3Cs are specifically formed to further a socially beneficial mission.
Pete Gingrass, principal partner with Future Point, a Wyoming-based L3C that supports the impact of integrated community development initiatives, says that even with the availability of foundation funds, Future Pointe accessed startup capital from internal networks such as friends, family and personal investments. "We chose not to seek out any institutional funding until we are able to demonstrate our model. Part of this demonstration includes being able to generate enough revenue through our core program activities to sustain operations," explains Gingrass.
That said, if an L3C owner is looking for capital from PRIs, Gingrass recommends searching through the Council on Foundations database to locate foundations by geographic area. "My second step would be to go through your network tools to see if anyone has relationships with foundation personnel. Building social capital is one of the ways that L3Cs will get funded in the future."
Another potential source of capital to consider is a micro-finance organization because many have predetermined social missions, too. Though micro-finance organizations have some of the same requirements as traditional lending institutions the L3C's mission may help make a strong case to snag a loan.However, Gingrass says, "Your L3C status will not provide any leverage to negotiate interest rates."
Pitfalls and Plusses
While L3Cs' social missions purpose provides a unique branding opportunity, it also imposes a duty on its owners "to manage the L3C in accordance with this purpose," according to Minnigh. To that end, Zwetsch says it is important for the business owner to draft an operating agreement that spells out obligations, contributions and other governance provisions, just like an LLC.
While there is no "low-profit police," Zwetsch says, "Ultimately, social purpose is your guiding star, and if you'll have to answer to anyone regarding profit, it may be those who fund your L3C or those your L3C serves."
The L3C represents a brave new world of social entrepreneurship that Minnigh says depends on the objectives of the people forming the entity and the potential pool of investors.
The immediate success of interSector Partners makes Zwetsch optimistic. "For those with a pioneering spirit, we believe the L3C experience will be fruitful, and the rewards will be many."