Check out the recent New York Times article concerning Hybrids and thier growth nationwide. As more states allow for hybrids to exist, the stakes just keep getting higher!


BUSINESS DAY
A Quest for Hybrid Companies: Part Money-Maker, Part Nonprofit
By STEPHANIE STROM (NYT)
More than 12 states have passed laws allowing companies to emphasize social benefits more than profit, bridging the gap between businesses and nonprofits.
More Articles On This Topic »

Happy Birthday to Who?

Birthdays only come around once a year, so what would be your birthday wish L3C? As you blow out the candles, we look back and reminisce.

It has been three years, since the first state in the country, Vermont, recognized low-profit limited liability company (L3C) as an official legal structure. Since April 30, 2008, nine additional states have passed legislation, including Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine, Rhode Island, Oglala Sioux Tribe, and Crow Indian Nation of Montana.

We beg the question, is this a time to really celebrate? Although several state legislations have taken the plunge, both efforts made by the Program-Related Investment Promotion Act of 2008 and Philanthropic Facilitation Act of 2010 have led to no significant federal legislation that allow L3C’s access to PRI’s and Private Letter Rulings. There has yet to be any evidence based research strengthening the L3C argument, nor a guarantee of these new social enterprises working among the current states enacting it.

To make matters worse… another social enterprise, Benefit Corporations are trailing its way into legalization. Benefit Corporations are geared towards modifying corporate law, rather than Limited Liability Companies law. Most importantly, Benefit Corporations do not have access to PRI’s, and call for complete restructuring of our economy. So far, Maryland, New Jersey, Vermont, Virginia, Hawaii and New York have all passed legislation for Benefit Corporations, and there are several states with pending legislation.

With the increase in tighter budgets, government is looking towards the for profit sector, instead of the nonprofit, to take social responsibility and serve the public. Instead of utilizing nonprofits, which have for years helped build stronger communities, they are looking towards new social enterprises which are already in need of funding to be created. Therefore, instead of saving money, our state is spending more money to jumpstart these new entities. Funneling money into these L3Cs takes a huge risk at the expense of the public taxpayers.

Throughout our country’s history, we have seen where an unrestricted capital market can create more problems than solutions. L3C’s are a prime example of what can go wrong. These social enterprises want less oversight, not more. Instead of assuming these enterprises will work, and passing legislation on them, careful and precise measures need to be taken to ensure unintended consequences do not occur.

So to you, L3C’s, is it really a Happy Birthday?

Welcome to the "NoToL3C" Blog... What Can You Expect?

Welcome to NoToL3C.org, the web’s only portal devoted exclusively to information, articles & blog posts for visitors seeking or wanting to contribute to a critical perspective of the organized drive to create L3C corporations.

In New York State, as well as many other states across the country, legislative advocacy is taking place to legally recognize low-profit limited liability companies, or L3C’s.  These exotic legal contrivances or “hybrids” are supposed to   carry out charitable or socially responsible purposes while intentionally not making too much money.  Some states have already passed laws recognizing the L3C contraption.  This means that they can already operate in any state in the nation, yet the advocates are still pushing for legislation in additional states.

If this all sounds odd to you, it does so because it is odd.   You may be asking why we need to spend taxpayer dollars for new laws in order to allow a for-profit venture to do something good.  The answer is that we don’t. 

 Indeed, sole proprietors or LLCs right now can engage in a commercial enterprise that is socially responsible and deliberately limit their profit?  Charitable 501c3 organizations are free to engage in mission- related activities that generate revenue as long as it does not do so for private inurement  interests.   
 
Charities are also allowed to engage in activities that generate unrelated business income or own a for-profit business - provided they pay taxes on the net income.  And, LLC corporations can currently be structured to receive Program Related Investments (PRIs) from foundations, which is the primary design feature of and the real motivation behind the drive to create L3C’s.

The goodness of the individual entrepreneur’s heart aside, this is really about a business model where entrepreneurs and investors gain greater leveraged access to (or perhaps “raid”) charitable assets through Program Related Investments (PRI’s)  while minimizing their own financial risks by shifting those risks to charitable sources  and avoiding the accountability and transparency that the public has demanded of charities.   

Why keep do the advocates keep pushing state-by-state legislation you may ask.  It is because such recognition fosters the “legitimacy” of these entities and may help in securing an expedited private letter ruling from the IRS.

The truth of the matter is that the L3C advocacy movement is one of smoke and mirrors.  NoToL3C.org is an effort to cut through the propaganda that is being distributed and the blurriness that is being created.   Quite frankly, we are not interested in duplicating or repeating the information and opinions that the well-organized L3C movement has created, so if you are looking for that information, there are plenty of other sources elsewhere for you to go.        

NY Nonprofit Press: L3Cs: Trying to Play Both Ends Against the Middle

L3Cs: Trying to Play Both Ends Against the Middle

Author: Doug Sauer, CEO, NYCON Originally Published in the New York Nonprofit Press Monday, 29 November 2010  Charities rely tremendously on our socially- and community-minded for-profit supporters. They assist us in our work through cash and in-kind contributions, sponsorships, board leadership, influence, business guidance, paying taxes, and the list goes on. Businesses exist, however, to make money and they can do so in socially responsible ways if they choose. Unlike for-profits, charities exist for a specific, government approved public purpose.  As such, we face ever increasing regulatory standards for accountability and transparency designed to demonstrate that our organizations and the individuals involved are not gaining private inurnment. Why this basic primer on the difference between for-profits and nonprofits? Well, there is a recent national craze that seeks to create a “fourth sector” made up of Low-Profit, Limited Liability Companies (L3Cs) that are legally for-profit businesses, but which are supposed to put their primary focus on social good rather than profit.  This movement is both misguided and potentially dangerous.  Vermont was the first state to enact legislation in 2008 establishing L3Cs as a legal business entity.   Since then Michigan, Wyoming, Utah and Illinois have followed suit, along with the Crow Indian Nation and the Oglala Sioux Tribe.  Several other states are considering similar proposals. Earlier this year, the New York Council of Nonprofits (NYCON) was surprised to see an L3C bill authored by Senator William T. Stachowski (D-Buffalo), suddenly advance out of its original committee of jurisdiction and proceed through several legislative steps before being passed by a vote of 50-11 on the Senate floor – amazingly, all on the same day.  A companion bill AB-10414 introduced by Assemblyman Richard L. Brodsky (D-Westchester) remained under consideration in the Assembly Committee on Corporations, Authorities and Commissions.  With the current legislative session at an end and their sponsors leaving office, these bills appear to be dead, at least for the moment. We at NYCON believe that is a good outcome and we are hopeful that there will be no effort to re-introduce L3C legislation for New York in the future.  Here’s why: Supporters argue that L3Cs innovatively combine the best of both the for-profit and nonprofit worlds.  Since they may legally generate a profit – albeit a yet to be defined “low profit” – L3Cs supposedly are capable of attracting new private sector capital in support of ventures with a broader social purpose.  Supporters also hope that the IRS will change regulations to allow L3Cs to receive Program-Related Investments (PRIs) from private foundations.  Those investments currently are not automatically eligible for inclusion as part of the grants to charities that foundations must make in order to meet their own IRS requirements.  I am sure that the core thinkers and entrepreneurs behind the L3C movement are sincere folks who seek improvements in our society.  That said, supporters fundamentally seek three things that are unacceptable to NYCON and many in the nonprofit sector: 1.  Access to private foundation dollars for risk leveraging purposes.  There are two problems with this.  The funding which L3Cs seek comes from resources that would otherwise be available to the good work and achievements of legitimate charities.  Secondly, the scheme put forth is that the L3Cs will be take in investments in separate “tranches”, or layers, each with its own level of securitization and risk.  Foundation PRI’s, they maintain, would be most helpful in providing the early-round and highest risk financing, thereby attracting for-profit, private sector investors during subsequent rounds when the risk is lower and chances of a return are greater.   NYCON believes that any investment model where funds from foundations take on the highest risk in order to protect private investors is totally inappropriate.  It goes against the traditional fiduciary responsibility which boards of directors, officers and fund managers of foundations have to safeguard their charitable assets.  Since the L3C is a private business, the entrepreneur owners themselves do not have any fiduciary responsibility and, moreover, are personally protected by being in a limited liability corporation. 2. Avoidance from the charitable regulatory and accountability environment.  The L3C model is an effort to find a legal and tax “space” with the least amount of public oversight and scrutiny possible. L3C entrepreneurs are accountable first and foremost to their investors and certainly don’t want to be restricted by the federal and state governance, financial, and compensation reporting and rules that charities live by.  This accountability to investors who expect a financial return as opposed to donors who solely expect mission return and regulators who are working to protect the public’s interest is a fundamental and fatal flaw in the L3C model.   Many of the contemporary regulations concerning nonprofits are due to private inurnment abuse and are critical to maintaining public trust.  Currently, a number of State agencies such as the Offices of Mental Health (OMH) and People with Developmental Disabilities (OPWDD) are working hard to prevent such excessive executive compensation through regulation and auditing.  Limited liability companies (LLCs) in New York are not required to have Boards of Directors or to make any kind of public disclosure of their organizing documents.  Without these and other requirements, there is a high risk that L3Cs will be fertile ground for excessive executive compensation and conflicts of interest, something which is prohibited by the Internal Revenue Code and regulated in charities by the IRS.   3.  Intentional “blurring” of the charitable definition and marketplace .   The public doesn’t understand the workings of C3’s much less that of an exotic, legal contrivance that is similar in name (L3C) and purports to not be what it appears.  Charities are working hard and continually to build the confidence of donors, organized philanthropy, consumers and the public at a time there is growing anger and distrust in the integrity of corporate and government institutions.  Creating a so-called fourth sector that relies on blurring, legally and in brand, the historic line separating for-profit from charitable organizations is a dangerous long term threat to the sector and public good will.  Concern with L3C’s is growing.  The New York Times recently explored examples of potential conflicts-of-interest at existing L3Cs in other states. (“Hybrid Model for Nonprofits Hits Snags”, October 26, 2010.)   Daniel Klienberger, a Law Professor at Mitchell College of Law in St. Paul, MN, has also outlined an extensive series of legal concerns. (“The Fatal Design Defects of L3Cs”, Nonprofit Quarterly, June 21, 2010). The creation of these entities in New York State will create a regulatory nightmare as there is no regulatory framework for them to operate within at the state or federal level.  The Internal Revenue Service has yet to rule on whether PRIs in L3Cs would be viewed as a legitimate use of charitable funds under legal guidelines established for private foundations.  Until such a ruling, any legislative action to establish L3Cs clearly would be premature. Current IRS and State regulations provide ample opportunities for charities to responsibly engage in revenue and mission generating enterprises.  NYCON itself is the sole shareholder of a successful for-profit insurance brokerage firm that has served and benefited the charitable sector for a dozen years.  NYCON is fully confident that the legislation passed by the NYS Senate and introduced in  the Assembly was intended to promote charitable causes and support the wide range of critically important work that nonprofits perform.  Unfortunately, we believe that the passage of legislation creating L3Cs as a legal entity in New York was ill advised and would have precisely the opposite effect. Doug Sauer is CEO of the New York Council of Nonprofits (NYCON).

Stanford Social Innovative Review: “L3C” Spells “Caveat Emptor”

“L3C” Spells “Caveat Emptor”
From the Stanford Social Innovative Review. Read the full article here.

Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits, but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

Read the full article here.

American Bar Association: L3Cs: Useless Gadgets?

American Bar Association: L3Cs: Useless Gadgets?

Business Law Today

Volume 19, Number 2 November/December 2009 
Click here for the full article

When I was a kid, I had a knife with many tools, and I used it frequently and for all kinds of tasks. It had a large blade, a small blade, several screwdrivers, tweezers, a can opener, a bottle opener, scissors, and other devices. It also had something that was marketed as a fishhook remover and fish scaler. I took it fishing, and even tried the hook remover and scaler—they were pretty much useless. I think of such a knife as very useful, adaptable for many purposes, with a few useless gadgets tossed in so that it can be promoted as a tool that does nearly everything one can want.


Limited liability companies are the multipurpose knives of the business organization world. They can be used well for many different tasks. It is this multiplicity of uses, all within one statutory form, that gives LLCs their value and their allure.


One trick with LLCs is to keep from burdening them with useless gadgets. Inclusion of such gadgets is dangerous since some people will attempt to use them, creating risk that should not be created. The well-advised will just use the good tools, and stay away from the gadgets. When my combination hook remover/fish scaler did not work, I folded it back into the knife's body and used a regular scaler. If an LLC gadget does not work, there will be costs incurred by those who attempt to use it to solve a real problem.


Low-profit limited liability companies (L3Cs), adopted in six states with numerous other states considering adoption, are, in the author's view, dangerous gadgets. They add nothing to the LLC package, and might give the unsuspecting user the unfounded belief that difficult tax problems have been solved. Before discussing the risk posed, this article will discuss concepts underlying L3Cs generally.  Click here for the full article

The L3C: Innovation or Gimmick?

The L3C: Innovation or Gimmick?

Originally Published on "State of the Art" Blog by James Undercofler, Professor of Arts Administration in Drexel University's Westphal College of Media Arts and Design

There's a lot of talk in the NFP arts and culture worlds about this new hybrid organizational model, the L3C. First, here is a brave attempt at a definition of it. Quoting and paraphrasing Emily Chan of the Nonprofit Law Blog:

"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization.  More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designated to provide a social benefit.  Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern.  But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.

"A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation's mission. Additionally, the fiduciary responsibilities of for-profit partners often prevent their participation in a foundation PRI in a for-profit venture.  The L3C avoids this common problem through its flexible membership rules which allow partners to structure the L3C and adjust ownership to best fit their unique situations.  By addressing these current investment challenges to PRIs, L3Cs are able to attract a greater influx of private capital from various sources of wealth in order to serve their charitable or education goals."


From what I can find, the L3C has been utilized primarily so far for projects in social entrepreneurship.  There's an online article in CNN Money that describes such a project (http://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies/).

PRIs can be made in the form of loans, equity investments, bank deposits and guarantees.  Like traditional grants, PRIs are used to support charitable organizations or to commercial ventures that fulfill a charitable purpose.  But unlike grants, PRIs are designed to be repaid, usually along with a modest amount of interest or other type of financial return. 

To be honest, the L3C leaves me scratching my head.  Does it have potential use in the arts and culture sectors, or conversely does it provide an avenue for foundations to give to quasi-commercial ventures in lieu of giving to arts and culture?  The two uses in the arts that I can imagine are: one, building projects in "challenged" neighborhoods where a case could be made that the gallery or theater would change the economic dynamics to the positive; and two, pre-commercial-run theatrical productions that have a chance of commercial success, but within that success gives a designated portion of its profits to a social cause.  There are surely other applications for others to construct.

The hopeful aspect in the creation of the L3C is that it's the first real diversion from the traditional 501(3)c model to come along.  Its creator (s) saw a need, and rather than forcing it through the traditional model, they created a new one to move forward.  Now let's hope that other hybrids, or altogether new models are on the horizon. 

Vermont Law Review: The L3C Illusion: Why Low Profit Limited Liability Companies will not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial Ventures

L3C ILLUSION: WHY LOW-PROFIT LIMITED LIABILITY COMPANIES WILL NOT STIMULATE SOCIALLY OPTIMAL PRIVATE FOUNDATION INVESTMENT IN ENTREPRENEURIAL VENTURES

J. William Callison & Allan W. Vestal Vermont Law Review Vol. 35:273
CLICK HERE FOR FULL ENTRY

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A Tough Hybrid to Swallow – the L3C

A Tough Hybrid to Swallow – the L3C
Published by Laura Otten, Ph.D., Director on November 19, 2009 01:12 pm under Articles

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 Corporation	Organizational 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. Full Article.

L3C: Pot of Gold or Space Invader?
Originally Posted By Rick Cohen for Blue Avocado on September 30, 2009 

For-profit companies continue to seek ways to obtain two benefits that are usually reserved for nonprofits: foundation grants and government tax exemptions. These efforts are led by both well-meaning individuals as well as those that simply want funding without community accountability. Regardless, they present risks and challenges to the nonprofit sector as we know and celebrate it. Rick Cohen tells us of one such effort that appears -- in the absence of opposition -- to be headed for adoption.

The hot topic in foundation circles is the L3C: the low profit limited liability corporation, the latest development in social enterprise. Several states are legalizing L3Cs and accompanying tax and philanthropic benefits, and its backers are pitching them for federal approval.

L3Cs are profit-making corporations, but their owners don't identify profit as their primary purpose. The mission of an L3C is a social benefit, doing socially productive and useful things, and only then earning a profit.

At the national level, the Council on Foundations has been actively promoting L3Cs, [4] on Capitol Hill for the past two years.  Already in four states and two tribes, individuals can form L3Cs and attract various types of investors, and, because of their charitable missions, tap into foundation loans and guarantees. At least they will be able to if Congress passes legislation giving blanket approval for such loans, or if the Internal Revenue Service (IRS) issues a ruling authorizing them.
There may be some sound reasons for the creation of hybrid models melding features of nonprofits and for-profits, hopefully helping localities and states attract new sources of capital for critical economic and environmental ventures. But states, Congress, and the nonprofit sector might want to be cautious about this social enterprise innovation.

Foundations funding for-profits
Foundations that see nonprofits as vehicles for meeting the foundation's goals have been using the term "sector agnostic" to describe grantmaking that should look only at a grantee's ability to meet those goals rather than at the charitable status of a prospective grantee.

L3Cs are part of a movement to expand the scope of charity, eventually including foundation grants and individual donations beyond 501(c)(3) public charities. An increasing number of commentators such as bike ride fundraiser Dan Pallotta [5] advocate changing the tax code so that contributions to (or purchases from) socially minded for-profits would be tax deductable. Opening up private foundation PRIs (Program Related Investments) to L3Cs is part of a dynamic of ostensibly public or social benefit businesses, including B Corporations [6], to expand the scope of charitable thinking and ultimately charitable support for for-profit corporations as well as nonprofit charities. In the public's mind and in some of the press commentary, the various states passing L3C laws are seen as conferring something like nonprofit status on for-profit business entities. It isn't true, but it's hard not to imagine this as the direction that the movement is headed.

And foundations can already fund for-profits. They can already make Program Related Investments (PRIs), low- or no-interest loans and loan guarantees to entities other than nonprofits if they either get an IRS letter ruling or take "expenditure responsibility" for the investment. They can hire for-profit firms through contracts the same way they "hire" nonprofit organizations through grants. And in the same way that they can invest their capital in less-than-socially-minded companies through the stock market, they can make "mission-related investments" (MRIs) in socially-minded for-profits.
So if foundations can already make loans to nonprofits (including their subsidiary business ventures) through PRIs and can make investments in socially responsible companies through MRIs (getting market returns), why are foundations pushing so hard for the ability to make PRIs to L3Cs?

Why are foundations promoting L3Cs?
Notwithstanding the economic development potential of the L3C model, we think there are two superordinate reasons relating to legitimizing and expanding the "charitable" interactions of foundations with for-profit entities:

First, foundations are looking for more ways to invest in alternatives to the nonprofit sector.  Sadly, some foundation executives and social entrepreneurs express, often sotto voce, limited belief in or frustration with nonprofits, despite their public statements to the contrary. One foundation and association leader recently challenged the "assumed exclusive" relationship [7] between foundations and nonprofits. Ralph Smith and his colleagues believe they are in the "solutions" business, eager to find and fund groups with solutions to social problems, with no predisposition that nonprofit foundations ought to be obliged to support nonprofit organizations.
Second, it's complicated to do PRIs for for-profit businesses (because of the need for IRS letter rulings), but PRIs do count toward required foundation 5% payouts. On the other hand, if a foundation wants to invest in a for-profit, an MRI is easier to do than a PRI, but the MRI doesn't count toward payout. The L3C innovation, if the IRS gives its blessing, means that a PRI to an L3C would count toward foundation payout.

L3Cs versus 501(c)(3)s
Social entrepreneurs will come through the walls at criticisms of the L3C model and the suggestion that foundation interest in L3Cs isn't entirely unanimously high-minded and benevolent. They cite instances where the spigots of foundation investments in for-profit ventures may be crucial for economy recovery in areas of high unemployment and desperate economic conditions.

Such a place is Michigan. Michigan's new L3C statute has resulted in 14 approved and 3 pending L3Cs [8] which see themselves as alternatives to automobile production in struggling areas of the state.  In North Carolina, a state senator has been promoting L3C legislation aimed at shoring up the state's faltering furniture building companies.

At the national level, a big interest of L3C promoters is to attract major foundation investments into the faltering newspaper industry. Senator Benjamin Cardin of Maryland introduced S.673 to make newspapers federally tax exempt if the newspaper is seen as achieving an "educational purpose" and "follows methods generally accepted as educational in character."  There has been plenty of positive commentary within journalism circles of commercial (failing) newspapers as candidates for L3C status.

The upshot for nonprofits
First out of the gate in 2008, Vermont has already recognized 68 L3Cs [9]. Utah has approved only one (the Salt Lake City Ballet Conservatory) with one more pending (the Full Curl Society, a sheep-hunting program reportedly with initial capitalization from former Utah Jazz star Karl Malone). Wyoming has approved one L3C. Illinois just enacted its L3C law. Legislation is moving toward approval in a half dozen other states.

On the positive side, L3Cs could be formed by nonprofits to attract support from people who don't want to make charitable gifts, but might "give" in return for a minimal rate of return. In an era of declines in charitable giving, low-return investments might be a useful substitute revenue source for some nonprofits.

Maybe L3Cs could get private foundations, normally skittish about mission-related investing, to do so by counting their MRIs toward required foundation payout. For example, an alternative energy program that is having difficulty finding investors in the conventional capital market might be able to get foundation investments.

But the noisy cheerleading for L3Cs may lessen the attention paid to the cautionary issues about these new social enterprises:

• There is no "ceiling" on profit in these "low-profit" entities as one advisor to the L3C movement has commented [10], or even any real definition of "low profit." Is it appropriate to have no controls on profit margin? When does some profit become too much profit, if ever?
• What would keep a coffee shop (community building), a soap company (health) or an insurance company (disaster protection) from becoming an L3C and thereby potentially getting tax exemption benefits?
• An L3C requires a profit-making business model, regardless of its socially beneficial goals. While some nonprofits could form L3Cs, many are nonprofits precisely because their activities and functions do not lend themselves to profit.  
• In states where L3Cs have been authorized, the state agencies in charge appear to be simply registering them without digging into their bona fides. As a result, the L3C lists, which include remarkably creative and witty corporate names (such as Peace Meals, Coolpass, Explorience, Ecozoic, the Vermont Haunters Club, Badasset, Tails on Trails, and many more), include a number of registered entities whose social missions and programs look, at first glance, somewhat dubious.  
• Some foundations might find it easier or more attractive to make PRIs to profit-minded entities than their usual nonprofit partners. Will nonprofits end up competing against L3Cs for PRI dollars?

Pardon us, but we're not sold on L3Cs. Community nonprofits -- arguably the most critically needed and the most innovative segment of the nonprofit sector -- will be largely left out of these new financing schemes. Diversion of foundation funds from nonprofits to for-profits is likely to result in declining health of the nonprofit ecosystem. And notwithstanding their interesting potential for attracting capital investments to struggling newspapers, faltering furniture makers, and new environmental and energy companies, the L3C scheme feels ideologically geared to expanding for-profit options for foundation loan-makers and, potentially in the long run, to foundation grantmakers as well.

Editor's note: Have the state or national nonprofit associations to which you belong taken up this issue for study and potential advocacy? We need our leadership organizations to be raising debate and making sure that the voices of nonprofits -- not just those of foundations and entrepreneurs -- are heard in that debate.