When it comes to business structures, social entrepreneurs have usually been forced to choose between a private company and a nonprofit organization.
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But with the advent of a new business structure, a third option may be on the horizon: the L3C.
Low-profit, limited liability corporations (L3Cs) are designed to be a hybrid between a charity and a for-profit business. The creation of the L3C structure started with nonprofits that face a rapidly shrinking pool of charitable funds, grants, and foundation resources. But although public funding is quickly evaporating, the number of private interests willing to invest in socially-driven endeavors is multiplying in leaps and bounds. However, the catch has been that private investors won't participate unless they can achieve a return on investment – an impossible feat for a traditional nonprofit.
The L3C business structure is unique in that it allows the organization to diversify its funding pursuits and allocate risks to allow a higher rate of return to private investors. Although this structure is still in its infancy, it holds the potential to become a powerful tool for entrepreneurs eager to combine their business savvy and social passion.
How does it work?
A variation of the more common limited liability corporation (LLC), a qualified L3C is a tax-exempt entity that has the ability to attract and reward private investment. Since it is capable of drawing from several different sources of funding, a L3C can draw capital from both charitable foundations and private investors. Although L3Cs are prohibited from making profit their primary objective, they are given the ability to assign a different layer of risk to each source of capital. Foundations assume the highest level of risk while private investors can be assigned progressively lower levels of risk to protect their investment.
Are L3Cs a good idea for every social entrepreneur?
In theory, L3Cs can work for almost any social entrepreneur. But there are a few things to keep in mind: First, L3Cs are not primarily motivated by profit. If your profit motive outweighs your social commitment, a L3C is probably not the right business structure. Secondly, L3Cs are most effective in scenarios where there is a pressing need in the local community, but the capital demands of the project require private investment and the outcome is capable of generating a return. For that reason, the L3C structure is commonly utilized in community housing and develop initiatives.
Can I create a L3C right now?
The short answer is a firm "maybe". Although L3Cs are gaining traction across the nation, they are still making their way through the state legislative process. Some states have already approved L3Cs, while others are currently considering their validity and applying their own restrictions on their use. The only way to be sure about the status of L3Cs in your state is to consult with your attorney before taking any action.