A Tough Hybrid to Swallow – the L3C

Posted by Laura Otten, Ph.D., Director on November 19th, 2009 in Articles, Thoughts & Commentary

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PolarDuck

My intent was to write about L3Cs—low-profit limited liability companies.    Five states already allow them, several more have legislation pending, and many are encouraging the congress to create such legislation.  Ever heard of them?

So I went looking for a simple, yet clear, definition of just what an L3C is.  In the process, I got sidetracked by a table comparing an LLC, an L3C and a nonprofit.

According to the design and intent of an L3C, it is a cross between a for-profit and nonprofit organization:  it is supposed to work for social good, but it can make a small profit, provide a return to investors AND apply for philanthropic dollars.  Funny, it sounds like a nonprofit!  You’ll get my drift in a minute, if you don’t already.

Take a look at this chart, provided by the Americans for Community Development, an L3C created to work “working with legislators across the country to enact the legal framework necessary to permit the formation of the L3C.”

Type of CorporationOrganizational Purpose(s)Potential Rate of Financial Return on Investment (ROI)Private Sector Resources
Limited Liability Corporation (LLC)

Financial

5% or greater

Market-driven; making money and building wealth

Low-profit Limited Liability Corporation (L3C)

Financial and mission-related

Between 0% and 5%

Philanthropic source invests with a lower than market rate of return; philanthropic investment lowers the risk and raises potential ROI for subsequent investors

Nonprofit [501(c)(3) or other tax exempt organization]

Mission-related

0% to negative 100%

Market incentives inadequate or non-existent

If you are smart  (a given with my blog readers), then you see the slight of hand these self-promoters have used to create this new organization that will compete with nonprofits.  Too bad they, as so many others do, like to spin things on an ignorant public, preferring slight of hand to truth and honestly. Too bad that these self-promoters didn’t understand, as so many people don’t, what a nonprofit is and how it operates.  If they had, they would have understood that there is no need for L3Cs, as nonprofits already are a better model for achieving the same ends.

Let’s begin with the second column of the chart:  organizational purpose.  I’m going to ignore the row for LLCs, because we get them:  they are all about making money, the more the merrier, for most.  But looking at the stated difference in that box for an L3C and a nonprofit, there really is no difference.  Every executive director, other staff member and board member of a nonprofit that wishes to survive knows that if the nonprofit is going to be able to deliver its mission purpose, it has to have a financial purpose.  Thus, nonprofits are financial and mission driven.  We know that we have to pay attention to our bottom line, run like that LLC, while always making sure that that bottom line allows us to fulfill our mission promises.  If not, how and why should we exist?  So, you tell me:  how do an L3C and a nonprofit differ?

Column three:  potential rate of financial return.  This is what really caused my ire.  For the L3C, it has 0%-5% ROI; for the nonprofit, it has “0% to negative 100%.”  Excuse me?  Those who believe enough in a social mission to invest in it—not make a gift, not a donation, but invest in an organization’s ability to deliver on its mission—understand that returns on investment are not always monetary, and that intrinsic rewards are just as valuable, if not more so, than financial returns.  And where does this minus 100% come from.  Do these managers of an L3C not understand the basics of operating a business?  If a company cannot provide a good enough product—be it a pair of sneakers, a washing machine, moving the homeless to homeownership, improving literacy in children, etc.—then that business will fail?  Because then, truly, the investor will see no return and will not continue to invest.

The return nonprofits offer is enormous.  Ask anyone why they volunteer with a nonprofit in helping to deliver the service or on the board, and the first thing out of their mouths will be something to the equivalent of “to give back” or “to help others.”  The return on this investment means more to them than a %5 financial return.  As anyone why they make a financial investment in a nonprofit, and one of the last things out of their mouth will be “to make money.”  They aren’t doing it for a financial return; most aren’t even looking for the tax deduction, though for some that doesn’t hurt, and may effect how much they invest.  Nonprofits are about helping—others, ourselves, our communities.  Not about making money for ourselves.

Why must this society sully things by seeing good only happening if it comes with a financial reward?  Nonprofits do a more than admirable jobs at serving the social good.  Why dilute that work by feeding America’s greed and creating an entity where mission takes a back seat to financial reward?  Haven’t we had enough lessons already what greed does to America’s economic system?

The opinions expressed in Nonprofit University Blog are those of writer and do not necessarily reflect the opinion of La Salle University or any other institution or individual.

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