The L3C - A New Tool for Social Enterprise
Recently, H.F. No. 2702 was introduced to the Minnesota House. The bill, if passed, will permit the citizens of Minnesota to form L3Cs (Low-profit Limited Liability Companies) in their own state.
As the creator of the L3C, which I call the for-profit with the nonprofit soul, I appreciate local lawmakers who recognize that ordinary citizens have a desire to perform socially beneficial services while earning a fair living. L3C are often called social enterprises. Up until 2008, however, there was no vehicle especially designed for social enterprise.
I created the L3C as a business vehicle required to have a charitable purpose without the cumbersome regulations embodied in the nonprofit sector. The L3C provides for owners who can both earn a fair living and share in profits. The L3C is all about doing good while making a reasonable return.
Americans have a long social history of both doing good and looking out for personal financial self interests. One example: Old-fashioned barn raisings. Barns helped farms prosper and prosperous farms were the basis for prosperous communities. Even the privateers that made up our early Navy during the American Revolution were essentially social entrepreneurs making a profit while doing the government’s work.
Finally, the mill towns of the Industrial Revolution were a mix of charity and business. The mill owners built worker housing, buildings for businesses, churches, etc. Our image of enterprising entrepreneurs of the 19th century usually does not conjure up a picture of a kindly grandfather doing this strictly because he loved his workers. What was understood was happy workers usually worked harder, stayed in one place longer, were less rowdy and made business more prosperous.
It is in that spirit and the American tradition of free enterprise that I created the L3C.
It does not take much imagination to see a thread of concepts we might call charitable intertwined with a goal of making money. Unfortunately, as we progressed through the twentieth century, society structured charity and making money into separate silos and never the twain should meet.
Our current regulatory framework for nonprofits institutionalized this concept to such an extent that nonprofits are legally required to avoid financially beneficial situations. I recognized that we needed a new way to perform charitable acts that could operate as entrepreneurial businesses while working with nonprofit entities within the regulatory environment of the nonprofit sector.
The L3C is a for profit structure created in the spirit of the natural mix of charity and profit on which this country was built. It is a variant form of the LLC, which is a very flexible, well thought out format for organizing businesses. It is perfect for entrepreneurs who want the freedom of a partnership, but the protection of a corporation. An L3C is required by the law of the state under which it is organized, to put charitable mission before profit.
A key to the successful capitalization of an L3C is turning the venture capital model on its head so the L3C has high risk capital at a low cost. This can be provided by foundations using all or part of their required yearly 5 percent charitable distribution to invest in a for-profit for the purpose of furthering a charitable purpose. The L3C is the perfect entrepreneurial vehicle designed to further charitable purposes and support itself. We hope the legislators of Minnesota will join the legislators of nine other states and two sovereign Indian Nations in permitting L3Cs to be organized within their jurisdiction.
Although, like a Delaware corporation, an L3C could be formed in another state and operated in Minnesota, it would be wonderful to see that the citizens could use a home grown L3C to help others.
Robert Lang is the founder of Americans for Community Development. ACD is the professional organization comprised of the individuals and organizations participating in the movement to create L3Cs (Low-profit Limited Liability Companies). ACD provides professional training, support, educational materials, certification and assistance to those who have formed L3Cs, those considering their formation, professionals working in the field, economic development officials, educators and students, government officials, and anyone else interested in L3Cs. In addition, ACD is the prime moving force behind state legislation facilitating L3Cs and federal legislation encouraging their use. ACD also is creating suggested standards and best practices for use of L3Cs.