Is 'Low-Profit LLC' the Next Big Label for Responsible Businesses?

Is 'Low-Profit LLC' the Next Big Label for Responsible Businesses?

This article originally appeared on GreenBlue's In the Loop blog.

There's been a lot of talk around the office lately about what the next decade has in store for the sustainability movement. One trend we've discussed is the development of new corporate structures that make it easier for businesses to pursue social and environmental good.

There's been a lot of media focus recently on Benefit Corporations (or B Corps), especially as Patagonia recently became the first company in California to elect this new corporate status. B Corps are required by law to create a positive social impact, in addition to profits for their shareholders, by taking into consideration how all their business decisions impact their employees, the community, and the environment.

Less discussed is another similar social enterprise structure emerging in the United States: the low-profit limited liability company, also known as the L3C. Could this new corporate model help advance more businesses toward sustainability in the coming years?

Similar to B Corp designation, the L3C framework is a new way of for businesses to be more socially and environmentally responsible without sacrificing their immediate bottom line. The L3C is a hybrid between the nonprofit and for-profit models in that it is essentially a profit-generating entity with a socially beneficial mission.

Like an LLC corporation, L3Cs have the same liability protection and are not tax-exempt; however L3Cs have access to forms of capital that traditional corporations don't qualify for, all in order to further social and environmental goals. Americans for Community Development describe the L3C as a company that "combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit… the for-profit with a nonprofit soul."

More specifically, philanthropic sources of funding, such as foundations, have the ability to invest in L3Cs through "Program Related Investments" (or PRI funds) and reap small returns (unlike with traditional grants) while still ensuring their tax-exempt status. Because foundations can invest in L3Cs and are willing to take on more financial risk in exchange for social returns (especially during the early stages of these ventures), the risk/return profile becomes much more attractive for traditional market-driven investors.

The L3C structure is essentially a way to leverage market forces as an effective means of achieving social goals at scale that the more traditional nonprofit model may not be able to accomplish.

Currently, Vermont, Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, and Wyoming are the only states that have enacted legislation allowing businesses to incorporate as L3C corporations, with additional legislation pending in other states. Maine's Own Organic Milk Company (or MOOMilk), which promotes farm preservation in Maine while producing and distributing organic milk, is a great example of a new L3C business.

The impetus for B Corps, L3Cs, and other emerging corporate structures is the belief that current laws governing corporations may be too restrictive for the more socially-minded organizations interested in long-term sustainability investments, as they may not be able to meet their social goals while facing pressure from shareholders to achieve increasing profits quarter after quarter.

While there are still many unanswered questions about these new types of businesses, such as how they will be monitored to ensure they are making a social impact, these enterprise models in which positive social and environmental outcomes can be coupled with attractive financial returns may ultimately prove to be an important mechanism to catalyze large-scale social transformation.

It remains to be seen if these models will actually change the way businesses operate, however it is clear that a new type of corporation and a better way of doing business is needed if we are to transform our economy.

Businessman photo via Shutterstock.