One of the themes I’ll be writing more about is the convergence of the non-profit and for-profit worlds. This convergence will be one of the major trends that define the next decade. The sustainability movement in the for-profit sector and the move towards metrics in the non-profit sector are two examples of such convergence. This past week Illinois announced a new legal entity called an L3C that bridges these two worlds:
The law, signed by Gov. Pat Quinn last week, allows the incorporation of for-profit, limited-liability companies, or L3Cs, a new hybrid structure for for-profit ventures that have a primary goal of achieving a socially beneficial purpose.
From an operational standpoint, it looks like the only major difference between an LLC and L3C is the social mandate that allows the L3C to take funds from a foundation. Legally, a foundation is required to give away 5% of assets each year, and an investment in an LC3 would qualify.
Still, “there is no profit ceiling,” said attorney Marcus Owens, a partner at Caplin & Drysdale in Washington, D.C., who is working with L3C Advisors to establish a branded definition of L3Cs and uniformity in laws from one state to the next. L3C Advisors also is pushing for federal legislation.
L3Cs pay taxes on income as all LLCs do, and contributions to L3Cs are not tax-deductible as they would be for a charity. However, foundation investments count toward their required 5 percent endowment payout each year, Lang said. L3Cs allow for multiple stakeholders with different terms. For example, foundations might settle for a lower financial return on their investment than private-equity investors.
This opens up a host of questions for foundation managers. What is an acceptable return? How do you measure the impact of a pure non-profit vs. a for-profit social benefit?
