Monday, April 12, 2010

Frankenstein Fix: L3Cs (Part 3 of The Frankenstein Series)

In the previous two parts of The Frankenstein Series, I wrote about Dr. Frankenstein's Creature as an analogue for our economy; something we created as a benevolent contribution to the World but became something damaging. I also wrote about one of the potential cures for the The Creature's effects, B Corporations. Today I'll turn to another type of organization seeking to re-cast business/philanthropy, the Limited Profit Corporation or L3C. (image from vivavisibilityblog)

The official stuff (with special thanks to the contributors on the L3C Connect Group of LinkedIn): The L3C is a form of limited liability company (LLC) and possesses many characteristics of a typical LLC.
  • The L3C is a for-profit entity
  • The L3C offers a flexible ownership structure, wherein each member’s management responsibility and financial stake may vary according to individual needs
  • The L3C’s members enjoy limited liability for the actions and debts of the company
  • The L3C is classified as a “pass-through entity” for federal tax purposes.
Where it gets interesting is the underlying purpose of the entity; what did we create it to do? Although both and LLC and L3C are profit-making entities, the primary purpose of the L3C is not to earn a profit, but to achieve a socially beneficial objective, with profit a secondary goal. A traditional LLC may be organized and operated for any lawful business purpose, the L3C must be organized and operated at all times to satisfy the following requirements:
  • The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s)
  • "No significant purpose of the company is the production of income or the appreciation of property” (the company is permitted to earn a profit)
  • The company must not be organized “to accomplish any political or legislative purposes.”
For philanthropic investors, the L3C’s organization deliberately mirrors the requirements in the Internal Revenue Code governing Program-Related Investments (PRIs). The L3C is designed to meet the IRS requirements for qualifying as a recipient of PRIs, however, the IRS has not ruled on whether investments to L3C's will qualify as PRIs.
A recent story about the reorganization of organic dairy farmers in Maine illustrates how this L3C organization can help in ways that traditional businesses may not have been able to. Here's what they're all about:
With a mission to “keep farmland and make farming profitable for farmers,” The Maine Farm Bureau teamed up with the Maine Organic Farmers and Gardeners Association and the idea of operating as an L3C was born. As [David] Bright [Secretary of Maine's Own Organic Milk Company] tells me, the founders have a social purpose of “providing an environment in which diary farmers can make money farming.”
Seems like a good mission to me, and what "intangible" value does having working farms in communities provide, in addition to their strictly economic & nutritional impact?
Special "thank you" to Nancy Gallant for her energetic twittering about L3Cs, seeking to make her own impression in this space with Time Well Spent, and recommendation for additional resources:

interSector Partners
Americans for Community Development
I really can't help but throw this curve ball (in honor of the start of the baseball season) and something that one could chew on about B Corporations as well; who defines what is socially beneficial?
Whether we answer that question or not, new ways to organize businesses seeking outcomes beyond financial gain is something worth pursuing.


Unknown said...

Great post - very informative.

Did you see that Maryland is the first State to recognize the B corporation?

Anonymous said...

Thanks for reading and indeed I saw that news. There are many connections to B Corps from my Alma mater BGI. I was privileged to have met some of these innovative socially aware business owners.