L3c

An overview of the L3C corporate form

By Bill Densmore
Reynolds Journalism Institute researcher
Last update: March 5, 2010

Overview

Under the L3C corporate form, proponents say, profits are subservient to a requirement to achieve a social mission, and investors are explicitly aware of this. Proponents say the social mission makes it possible for foundations to loan or invest in the L3C as a "program-related investment." Bylaws and management can be flexibly constructed to allow collaboration, different member classes and other features common to a co-operative. Operating profits, after returning initial investment capital and funding R&D and reserves, could be directed to the social mission -- such as providing grants for investigative or other forms of civic journalism.

• "This language was carefully developed to qualify these new entities to receive investments from foundations through Program Related Investments," Kate Barr, executive director of the Minneapolis-based Nonprofits Assistance Fund, has said. But she also added recently: "It is not, however, a solution to nonprofit or business entities that have expenses that are higher than revenue (that’s called a deficit in both worlds). It is also not a solution to a business or nonprofit that is losing its market, audience, donors, or other revenue sources."
• There's an overview of the L3C form, written in November, 2008, as part of our Information Valet Project research at the Donald W. Reynolds Journalism Institute, the Missouri School of Journalism. Here's the link: http://www.newshare.com/ivp/l3c.pdf
• The [Wikipedia page on the L3C is comprehensive.
• Money magazine's online site also posted a good overview in Feb. 2010 profiling a dairy-based L3C. Here's an excerpt: "MOOMilk is a "low-profit" limited liability corporation, or L3C. It's a controversial new type of business entity intended to make it easier for companies with a social mission to receive investments, including loans and grants, from charitable foundations . . . Since April 2008, five states and two Indian tribes have signed legislation enabling companies to incorporate as an L3C, which is generally defined as a taxable for-profit business whose primary goal is to achieve a stated social mission. Profit is a secondary goal."
• The Council on Foundations also links to an excellent overview (DOWNLOAD PDF).
• Vermont was the first state to adopt an L3C-enabling statute, in early 2008. In February, 2009, the Vermont Law School held a two-day symposium on alternate corporate forms, and focused on the L3C. You can download a PDF of the scheduled program to see who the experts were.

Background briefing

In a nutshell, the L3C form is a method for putting social mission ahead of profits within the context of a for-profit entity. So the idea is that you tell your stockholders, in effect: "We intend to make money, but for a specific social purpose. We may accept lower profits to further the purpose. Caveat emptor if you are going to invest." This gives legal cover to the officers and directors of an L3C to be mission-focused and not get sued for NOT pursuing profit maximization.

Here's the rub: About seven states have enacted L3C enabling legislation. The thought is that an L3C ought to be able to receive "program-related investments" from foundations. The problem for foundations, is that there is no statutory assurance that the U.S. Internal Revenue Service will regard their investments in an L3C as "program related."

This is important for the foundations because if it isn't program related, it can't be considered part of their at least 5%-a-year grant-making activities qualifying them to keep their tax status. If it isn't "program related" it would have to be considered part of their portfolio investing and then that runs afoul of their fiduciary obligation to invest their portfolio for return not mission. So foundations haven't been jumping to back L3Cs or encourage their formation. Robert Lang, the subject of my interview in Dubuque, linked below, is working to introduce legislation in Congress to mandate appropriate treatment of L3C investments by foundations. I think if that law gets enacted, L3Cs will very quickly become fundable, and mainstream.

Legal work in Washington

The Media Access Project, headed by Andrew Jay Schwartzman, 1625 K Street, NW, Suite 1000,Washington DC 20036 - (202) 232-4300, is helping Bob Lang with the enabling legislation. Attorney Elizabeth Minnigh of the law firm of Buchanan Ingersoll & Rooney is working on the language.

Columbia report endorses L3C concept

Leonard Downie, retired Washington Post editor, and Michael Schudson, a Columbia University Graduate School of Journalism professor, co-authored a much-quoted report: "The Reconstruction of American Journalism." And there's a {http://www.newshare.com/l3c/columbia-excerpt.doc section of their report] which cites and recommends the L3C form.
The corporate-social-responsibility movement is now looking at L3C as a concept and you may see some activity from that quarter. Foundations are so risk averse that they aren't generally on the barricades supporting this. However, their umbrella Council Foundations includes L3C federal enabling legislation in their policy agenda: (DOWNLOAD PDF EXCERPT)

"4) Low-profit Limited Liability Company (L3C) Proposal
"Position: The Council supports federal legislation that would allow foundations to make program-related investments to Low-profit Limited Liability Companies (L3Cs). We will identify champions in the House and Senate to introduce the L3C legislative proposal. With the assistance of colleague entities, we will follow the activities in the various state that are considering the passage of the L3C concept. This will require continued negotiations among disparate parties as to simple, clear legislative language that achieves our goal."

Audio resources for detailed understanding

Bob Lang, originator of the L3C idea, and Peoria, Ill., reporter Jennifer Towery have been tag-teaming discussions about the L3C to the news industry and I caught up with them Sept. 18, of last year in Debuque, Iowa. Our 12-minute discussion is available as a podcast or stream. In addition, here's audio of my breakout at JTM-Seattle:

On Jan. 10, 2010, I facilitated a discuss at the Journalism That Matters conference in Seattle discussing the L3C form and there's streaming and downloadable audio of that session, too. / DOWNLOAD PODCAST.

Collecting other links

We'll try to add useful links here:

• http://www.niemanlab.org/2009/08/whats-keeping-news-organizations-from-trying-the-low-profit-model
• http://www.poynter.org/column.asp?id=131&aid=159320
• http://www.ojr.org/ojr/people/davidwestphal/200811/1577/

Contact info

There are a growing number of people following the L3C policy discussion. Besides the key proponent, listed below, and the Media Access Project and attorney, listed above, the idea has started to develop some opponents, who seem concerned mostly with the idea that the profit motive should not be mixed with social purpose.

Contact for Bob Lang, key L3C proponent

Robert Lang, CEO
L3C Advisors, L3C
PO Box 236
Granite Springs, NY 10527
914-248-8443
914-248-6253(fax)
robert.lang@l3cadvisors.org
"An L3C is the for profit with the nonprofit soul"
http://americansforcommunitydevelopment.org/

Author of the Vermont statute

The lawyer who first wrote the enacted Vermont statute:

Marcus Owens
Caplin & Drysdale
One Thomas Circle, NW, Suite 1000
Washington, DC 20005

The law firm which lobbied to get it passed in Vermont was:

Downs Rachlin Martin, PLLC
52 State Street
PO Box 1072
Montpelier, Vermont 05601
CONTACTS: John Hollar or Thomas H. Moody
PO Box 190, 199 Main Street
Burlington, Vermont 05402
802-846-8316 (Moody -- direct)
802-734-8316 (Moody -- cell)
802-860-3648 (fax)

• http://www.drm.com/news/thomas_h:_moody_addresses_utah_philanthropists_regarding_vermont_l3c_act
• http://www.drm.com/business_law/l3c_-_low-profit_limited_liability_companies
• http://www.nonprofitsassistancefund.org/blog/2008/05/12/where-for-profit-and-nonprofit-meet/