Social Enterprise Model Nabs Another Win

The popularity of social enterprises -- businesses with a social mission -- is growing. But are they legal?  The drive to make them so inched another step forward on Friday, with North Carolina becoming the latest state to endorse for-profit business structures that make social benefit their primary focus.

So far, six other states and two Indian tribes have legalized L3Cs, or low-profit, limited liability companies -- Vermont, Michigan, Illinois, Wyoming, Maine, Utah, and the Crow Indian Nation and the Oglala Sioux Tribe.

L3Cs are run like regular businesses and are profitable but their primary aim is to provide a social impact. L3Cs can attract various types of investors, as well as accept social investments from philanthropic foundations in the form of program-related investments, mission-related investments, loans and guarantees. L3Cs were created to bridge the gap between nonprofit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures while simplifying compliance with IRS rules for so-called "program investments."

So far, many foundations support the L3C structure because it allows them to invest in such for-profit social enterprises and make loans to them -- much as they do now with public charities and nonprofit organizations. Proponents of L3Cs also say they can help to revitalize and realign many types of low-profit businesses that already have a social purpose -- whether newspapers or affordable housing centers -- with a mission of community service.

The creator of L3Cs, Robert Lang, the CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation and the Founder and CEO of an L3C called L3C Advisors, says the model is aimed at lowering the amount of profit a company needs to make in order to woo diverse investments. "The participation of the foundation, which is seeking high social return but low monetary return, serves as a catalyst for high investor return," says Marc Lane, a Chicago-based attorney who authored Illinois' L3c legislation.

Critics of L3C legislation fear L3Cs will upset the traditional nonprofit sector by making it harder for charities to compete for shrinking dollars. Other critics say L3C legislation fails to clearly define what constitutes a "socially beneficial purpose." And there are other problems. The use of foundation grant money by profit-making ventures may require different kinds of reporting and accountability structures, critics suggest.

While the L3C form is still fairly new, dozens have been incorporated already and sector analysts predict more widespread adoption over the next couple of years. Current examples of successful L3Cs include CoolPass, which offsets carbon to reduce greenhouse gas emissions. It uses a significant portion of its sales to fund its Assisted Home reduction program and to help low-income homeowners with EnergyStar appliances and home upgrades. Another example of an L3C is  Radiant Hen Publishing, which partners with nonprofits and companies to publish books that teach social and environmental values, while also incubating new authors and artists and giving back to the community.

What do you think, social entrepreneurs? Is it time for more states to ratify L3Cs? Or, is more work needed to make the model more tenable? Let us hear from you either way.