Q: I recently attended a seminar on the new corporate structures available to those who wish to do good, without going the nonprofit corporation route. The speaker mentioned L3Cs, B-Corps, and B Lab Certification. As someone who is introducing a program that will make a real difference for a lot of people in my community, but who doesn’t really want to jump through the hoops required of traditional nonprofits, I’m intrigued. What can you tell me about these alternative structures? Are they a better way to go?
A: First, I’m glad you aren’t just rushing out to start another nonprofit – especially if you have reservations about working within that structure. While there are pros to incorporating as a nonprofit, there are also cons. For someone who wants to retain control of his/her organization and stay particularly nimble, yet make a social impact, the new hybrid corporate structures are an alternative – if they are available in the state in which you live.
Despite the spate in recent years of articles and conference presentations on such organizations, where a social mission and the profit motive work together, they are still pretty rare. In 2013, only two states legally recognized B-Corps (Benefit Corporations) and nine states accepted L3Cs (Low Profit, Limited Liability Corporations). Congressional leaders in Florida, where I live, have written legislation to allow for the L3C, which I understand (but can’t confirm) is to be implemented in July 2014. But North Carolina, which was one of the first states to have adopted the structure, has decided to do away with it. So, general acceptance is not exactly occurring at lightening speed.
Outside of the two states that require specific socially beneficial performance standards to be written into the governing documents and operating principles of those corporations looking to register as Benefit Corporations, “B-Corp” merely refers to a trademarked certification. For-profit corporations with a social mission and a commitment to accountability and transparency that want this certification complete an online assessment and pay a royalty ranging from $500 to $25,000 annually to use the name and to advertise as “B Lab Certified.” The reason the shareholders of a corporation might seek such certification is to be in a better position to attract and accept program-related investment (PRI) dollars, such as equity investments, loans or loan guarantees, to pursue their social mission. B-Corps are taxed on net income; and, while dividends are paid to its shareholders, the corporation may choose to make distributions to charities as well, though there is no deductibility for those charitable contributions.
The L3C is a for-profit corporation formed with a substantial nonprofit or educational purpose. It is designed to easily facilitate the investment of PRI dollars from foundations that share its philanthropic thrust. Because members of the corporation do not need to be compensated equally, L3C organizations allow for tiered investment. In other words, early investors may invest strictly to further the charitable purpose. They recognize the program will take time to grow and they are willing to forgo a financial return in order to lay the groundwork for a social return. As the program and profits grow, future investors may enter at a level in which they expect to see both an increased charitable impact and a monetary return on their investment. L3C organizations are perceived to benefit from being able to promote themselves to the community as mission-driven. Like other for-profit organizations, L3Cs are not tax exempt. And, they can’t lobby.
There have been a number of articles claiming that L3Cs are “unnecessary,” “misleading,” “unwise,” “pure hype,” or “full of fatal design defects,” and that the LLC (Limited Liability Corporation) can provide most of the same advantages without the disadvantages. Among the arguments, L3C organizations are often speculative in nature and foundations – a targeted source for funding since venture capitalists tend to expect a financial return on their investments – are generally prohibited from making speculative investments. In fact, foundations seeking to invest in them have to request a private ruling from the IRS to ensure that they do not lose their tax-exempt status.
There are also a number of day-to-day business issues that make the adoption of a hybrid difficult at best. A key one is, realistically, do you allow the profit or social good motive rule if the two are at odds? Another is while transparency is explicitly required, these are private companies and private industry often relies on trade secrets for its success. The IRS does not currently recognize L3Cs, so such corporations have to file federally as a general partnership, sole-proprietorship, or other designation. Further, with less than 500 L3Cs registered nation-wide, there is an extremely limited track record and virtually no template for working in two diverse environments at the same time that new corporations looking to go this route can reference.
There is much that must be left out of a brief article like this. If you do decide to explore an L3C, be sure to do your due diligence and find an attorney who has experience in setting up these hybrids. Unfortunately, there aren’t many!