April 29, 2017  
 
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L3C Business Structures

Written by Tim Morral for Gaebler Ventures

Low-profit, limited liability corporations (L3Cs) are fast becoming the organizational structure of choice for social entrepreneurs. We take a look at this new organizational form and why it's gaining in popularity.

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.

Tim Morral is a veteran business writer who specializes in helping entrepreneurs launch and grow their companies. Based in Rochester, NY, Tim has worked extensively in the areas of brand communications and small business content creation.

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Conversation Board

What's your take on L3C entitites? Is the L3C form of organization one that can transform social entrepreneurship to a higher level?

Jon Gruett 7/14/2010

I am so pleased that such a new corporate structure like this exists now. I have been involved in several startups in the past whose goal was to develop a product for use in a charitable environment but the investors would not fund it due to the tax treatment and the extended time it took to design the well meaning product to help the developing countries. Finally! A corporate structure exists that allows for well-meaning wealthy people can fund product developments that will help millions of people. Well done, inventor of the L3C! You are truly a blessing to those of us waiting for such a structure to help humanity!

Israel 3/16/2011

I have come across the L3C before but neglected to pursue, nevertheless, I would like to know how much it cost to start one, what kind of lawyer to ask about L3C in NY State, and how to sell it to potential investors instead of the other two models? Waiting for wisdom...


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