L3C designation

As many of you may know from the listserve postings and from this blog, I am beginning to do research on types of governance of markets and market organizations. Interestingly, I find that many organizers that I am chatting with simply believe that they cannot get 501c3 status (mostly through informal local advice they get or even during the first foray to I.R.S.) or think the 501c3 process will be too long or arduous. In response, they incorporate as other types of 501s that do not allow donations or make it easy to receive grants. Just as often, many seem to not do any incorporation which, until a terrible thing happens and those running the thing are held financially responsible and lose their personal property as a result, may feel like enough. This is particularly of concern to me when markets are run by a farmer and therefore operating without a corporation or LLC designation may mean endangering the farm itself.
One of the options may ultimately be the L3C designation. As I was beginning this post, I received a call from a friend who works with a foundation (that does not fund food work, sorry!). Upon hearing what I was writing about she shared that she is also researching the L3C as a way to help innovative social enterprises that will not be covered under their grant-making rules.

While still largely untested, the low-profit limited liability incorporation may become useful for food enterprises, such as farmers markets. It means that profit is possible but profit is secondary to the general purpose and good of the organization. It allows for program-related investments (PRI) from foundations in states that have authorized it. So far, legislation has been passed in Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont, and Wyoming with many other states having introduced legislation.

So take a look and I’ll have more on this later…
L3C

Much more L3C info

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4 Comments

  1. Hi Darlene, This post came up in a news alert for me. I work at PRI Makers Network, an affinity group of foundations who seek to advance program-related investments (PRIs) as a tool to leverage their assets to further their missions. To your post, here’s the good news: Foundations are free to make these investments not only to non-profits but to for-profit businesses whose success serves the foundation’s mission.

    Thus, a foundation whose mission would support public markets can indeed make a below-market rate loan or other investment in a for-profit (LLC, corporation, even sole proprietor or partnership) and have that investment count toward their annual distribution amount. (Folks know this as “the five percent.”) This is very, very barebones info here, and readers can learn a lot more at http://www.primakers.net.

    Note also that foundations are increasingly investing their endowment funds in mission-related investments. MRIs are risk-adjusted, market-rate investments that satisfy foundation rules to protect and grow their endowment (aka “corpus”) while choosing to make investments consonant with their mission. Visit our partner organization More for Mission at http://www.moreformission.org to learn more about MRIs.

    The important take-away for your post is that while some argue for the necessity of the L3C structure, it is not required: The IRS permits foundations to make PRIs to businesses and non-profits of all stripes, and there is no undue burden on either the foundation nor the investee. Interested foundations can visit our website and consider joining our association.

    Thanks.

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  2. Thanks Paul for your comments. As I have hopefully outlined, the L3C is a option and may suit some businesses very well. There is no one size fits all for markets or food-based enterprises to say the least.
    As for foundations making a loan or below-market investment in these programs, it has been rarely used yet in the foundation world with food system work, and of course makes non-profit board leery. However, there is no doubt that foundations are moving beyond simple grant making to 501c3 organizations..The point is, learn as much as you can before establishing your incorporation….and keep up with foundation news…

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    • Darlene, Thanks. I don’t doubt your direct experience having difficulty finding foundations whose mission includes supporting food system and security work willing to make program-related investments (PRIs) to for-profits. (I also believe there are foundations who do make PRIs in this space.) I wager many of them don’t yet make PRIs and/or are not aware they can work with for-profits. The point of a PRI is to provide an additional vehicle — in addition to granting. PRIs must be made at concessionary terms: A PRI in the form of a senior loan at low or no interest can make it easier to encourage market-rate-seeking investors to join the effort as the PRI serves to reduce their risk and makes the project underwriting more favorable for them. In short, the foundation’s goal making a PRI is not and cannot be to make money — it to advance their mission. Foundation PRI metrics are the same as for their grants: Did they do what they said they were going to do, and did we provoke the mission impact we signed up for?

      I think food system advocates have a role in talking with their foundation program officers and other staff and leadership to encourage them to check us out if they aren’t already members. We have lots of resources available to everyone and webinars and in-person intensive institutes for foundations.

      This is a rapidly emerging arena. It is exciting and holds out the possibilities of increased leverage of foundations’ assets (so-called mission-related investments or MRIS) as well as the funds they make available for distribution each year (PRIs along with grants).

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