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.
"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.
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.
