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.
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Thanks for this article, as
Thanks for this article, as well as for the information in the above comment. I think it's important to have more discussion about how to support 'low profit / high value' business ideas in their early stages.
As founder of an early-stage, for-profit company with an environmental / social impact, I would LOVE to see L3Cs come about. It kills me to see only non-profits qualify for EPA and foundation grants.
It's frustrating, because I've seen non-profits set up to get grants that that directly support for-profit businesses without being transparent.
Ultimately, profit is an important piece of sustainability. It would be great to see tax code provide more support to sustainable businesses and entrepreneurs and less support to unsustainable industries that already have significant capital at their disposal.
@BrookeBF @RecycleMatch
Nice article. It is worth
Nice article. It is worth clarifying that B Corps and benefit corporations are not the same thing – “B Corp” often refers only to the third-party certification made by the non-profit B Lab (see following website for certification requirements: http://www.bcorporation.net/Certification-Overview). Any corporate entity can become certified as B Corp.
Benefit corporations, however, are a distinct legal corporate form established in California, New York, Hawaii, Virginia, Maryland, Vermont, and New Jersey (other states are pending). Benefit corporations can use B Labs for third-party certification, and can thus also have B Corps certification. But there are many B Corps that are not legally incorporated as a benefit corporation.
Regarding the thrust of your article, I think the L3C is great in concept, but there are some big hurdles. Foundations continue to be wary of making program-related investments (PRIs) in L3Cs. Because any entity can receive a PRI if it meets the eligibility requirements (including for-profit and not-for-profit enterprises), it is not clear to me whether L3Cs actually do have "access to forms of capital that traditional corporations don't qualify for," as you state in your article.
Because PRI eligibility is not black-and-white, foundations must spend a lot of time and money having their attorneys review whether a PRI will be legal under Internal Revenue Code and Treasury Regulations and in many cases seek approval from the IRS before making a PRI. Because of these obstacles, many choose to forego making PRIs altogether. PRIs accounted for less than one percent of total qualifying distributions made in 2005 and 2006 by the more than 75,000 foundations in existence in 2007—$734 million was invested by a mere 173 foundations during these two years (Lawrence 2010, in Schmidt 2010).
The L3C was designed to facilitate PRIs. The hope was that by including all of the requisites for a PRI from Internal Revenue Code and Treasury Regs written into the states’ legal definition of an L3C, then PRIs could be made to a L3C without worry of legal repercussions or obtaining a private letter ruling from the IRS. Well, this isn't panning out, yet. A big reason: Internal Revenue Code does not recognize L3Cs, nor does it presume that they can legally receive PRIs. There is work underway to amend the federal Code to facilitate PRIs in L3Cs (see Philanthropic Facilitation Act of 2011, HR 3420). This could be a game changer for L3Cs.
Credit goes to my wonderful professor, Elizabeth (Betsy) Schmidt, at the Marlboro College MBA in Managing for Sustainability for teaching me about L3Cs. She studied Vermont L3Cs and found that none received PRIs. Here is a link to her fantastic 2010 article from the Vermont Law Review, “Vermont’s Social Hybrid Pioneers: Early Observations and Questions to Ponder,” referenced herein: http://lawreview.vermontlaw.edu/files/2012/02/19-Schmidt-Book-1-Vol.-35.pdf