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Illinois enacts L3C law

Jeff Trexler | Wednesday 12th August 2009

The Chicago Tribune has an extensive article on Illinois' adoption of an L3C statute. Here's the opening--pay attention to the emphasis on the L3C's promise for attracting new investment capital:

After nearly four decades of running a staffing agency on a shoestring budget, John Plunkett hopes the next business he starts will be a moneymaker thanks to a new law that recognizes for-profit businesses with a strong social bent.

The law, signed by Gov. Pat Quinn last week, allows the incorporation of low-profit, limited-liability companies, or L3Cs, a new hybrid structure for for-profit ventures that have a primary goal of achieving a socially beneficial purpose.

"One of the problems we've had for four decades is operating with enough capital to do what needs to be done to grow and thrive as a business," said Plunkett, founder and chief executive of Harborquest Inc., a Chicago non-profit staffing firm that aims to move disadvantaged workers into better jobs.

While the charity, which has an annual budget of about $5 million and employs 20 staffers, competes with for-profit staffing firms, it has struggled to come up with working capital to fund its growth because most of the grants it receives are designated for programming expenses only, Plunkett said.

By launching an L3C with a similar social purpose, Plunkett would be able to offer investors a financial return.

"It's a means of bringing more investment to the table," he said. "This might offer real growth possibility."

What's particularly noteworthy about this, of course, is that at base the L3C statute doesn't really do anything that wasn't already possible.

A charity looking for funds from a for-profit venture could have launched one years ago; of course, there are significant tax concerns that the charity would need to address in regard to governance and management, but the L3C does nothing to change that.

Private foundation program related investments for for-profits that serve a social purpose have been around for decades. You don't need an L3C to get them; the L3C is simply an attempt at fashioning a standardized form for signaling eligibility to receive PRIs.

Likewise, an LLC that wants to function as an L3C in a state without such a statute could simply add the same restrictions to its operating agreement.

Finally, the L3C statute does not add any incentives for investing in such a blended value venture.

I say all this not to discourage anyone from forming an L3C or advocating for a similar statute in their own state. Rather, my aim is simply to provide a needed reality check. Based on the experience of another standardized social benefit form--the UK's CIC--the L3C is likely to be no more a magnet for investment and revenue than any other kind of business. In fact, it might even prove to be less successful, since most investors won't know what it is. Rather than simply dreaming about how the L3C could solve your organization's money problems, you should also look into what is already possible.

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In 1996, the same concept appeared as part of a white paper for an alternate economic paradigm, for President Clintons' re-election committee.

http://jm.ly/k6YBr5

In 1999 the theoretical concept was deployed to source a development initiative and microfinance bank for USAID in Russia. The Tomsk Regional Initiative resulted in 10,000 new business owners, with > 95% surviving more than a year.

http://jm.ly/0eDK0Y

In a subsequent interview marking the UK presence of P-CED founder Terry Hallman relates the "swords to plowshares" objectives in reforming the orthodox model of capitalism.

http://jm.ly/A6gQuV

Jeff Mowatt