L3Cs for Social Enterprise

Many people interested in forming a social enterprise are torn between establishing their business as a nonprofit or for-profit entity. This structural battle has lead to a new form of corporation called the Low-profit limited liability corporation (L3C). This new corporation status has steadily gained popularity among entrepreneurs and is becoming a popular choice for those seeking to find a more appropriate fit for their social enterprise.

The low-profit limited liability corporation was formed to be a combination of nonprofit social missions and the savvy business models in the for profit world. The pioneers of this business structure were seeking an alternative to the limitations placed on nonprofit fundraising, especially in an economy that is producing less and less opportunities for nonprofit funding support. Using an L3C model allows socially motivated enterprises to draw in capital from investors interested in becoming active in businesses with a double bottom line (focusing both on some form of social change in conjunction with a for-profit business model). Unlike funding sources for nonprofit organizations, investors in social enterprises have flourished recently and have found a home with the L3C social enterprise.

Many investors in this business form are intrigued with the idea that they can receive a return on their investment- an option unattainable with the nonprofit corporation. The L3C captures the tax-exempt benefits of a nonprofit entity and allows for capital to be raised from socially conscious investors seeking a modest return on investment. This convenient hybrid allows L3C social enterprises to capture both public and private funds. Like the traditional limited liability corporation (LLC), the L3C designation allows for the profits obtained to be redistributed to its investors and owners; all while maintaining a social mission and philanthropic zeal.

A low-profit limited liability corporation has the added of benefit of being able to secure foundation funds that are reserved for program related investments (PRIs). Foundations are required to only invest funds in organizations that seek to further its cause. With this requirement foundations have been reluctant to invest funds in for-profit businesses for fear that they will not qualify as a program related investment. Unsure of how the funds will be used many social enterprises lose out on foundation funding when set up as a traditional limited liability corporation. L3Cs are legally established PRIs and as a result foundations are free to invest in social enterprises that adhere to its mission.

With the benefits of the L3C designation the option to establish one of these corporations is limited around the country. Vermont was the first state to pass legislation that allowed for a low-profit limited liability business structure in April of 2008. Since then, Michigan, Wyoming, Illinois, Maine, Arkansas, North Dakota, Utah and two Indian Tribes have adopted similar L3C filing status legislation. There is also pending legislation in Georgia, Tennessee, North Carolina, Oregon, Washington, and Missouri. While, the filing status is not available in every state, an L3C can operate in any of the 50 states.

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Photo courtesy: L3C