New Models: The Low-Profit Limited Liability Company

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Woke up this morning to read and digest a new and thought-provoking contribution to the going-around-in-circles “new models” discussion. If you check out Andrew Taylor’s The Artful Manager, his newest post, “Somewhere Between Profit and Nonprofit” explores the idea of a Low-Profit Limited Liability Company, commonly abbreviated as L3C. I’ve included the salient paragraphs of Taylor’s post because I think they ought to provoke some discussion in the theatrosphere. The one question I have, meanwhile, concerns corporate tax liability. Is there any? Can you form one in a state that allows one but de facto operate it in another? Could states use the ability to create L3Cs as a way to compete against each other for capital investment, like with tax-subsidies for film production? Are there any statistics on how many of these have been formed nationally and how they’re doing?

Anyway, the salient graphs (I’ve included all the hyperlinks from the original post):

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….When forming a business, individuals and groups can select from many forms — S Corporation, C Corporation, LLC, LLP, Sole Proprietorship, and such — depending on the nature of the work they have in mind. The 501c3 nonprofit is a particular flavor of the Non-stock corporate form, designed to assist enterprises with a social or public purpose that can’t sustain their operations or capital needs through traditional markets (so philanthropy and volunteerism step in).

Unlike the for-profit world, which has a full palette of options for corporate form, social enterprises have had rather few. The 501c3 is required by most donors, government granting agencies, and foundations for gifts and grants. But it carries a cost, as well — it’s hard to manage, govern, and sustain, its awkward for enterprises that plan a profit (even a small one), and it tends to be permanent even when permanence isn’t required.

So, in response, the L3C is intended to look and act like a small business (its parent form, the Limited Liability Company, is a darling of entrepreneurs), but also allow for social investment from a range of foundations and donors. Donations to an L3C are not tax-deductible for the donor, nor will they qualify for traditional grants and government subsidy. But they could become vehicles for attracting Program Related Investments (PRI), which foundations use to encourage activity in blighted communities or industries.

The L3C continues to pop up as an option for the beleagered newspaper industry, for example, where the traditional profit engines have vanished, but public interest in a vibrant city newspaper remains….

Actually, if I had any kind of brain, I’d have looked down toward the end of the post, where there is a link to a blog that is new to me, Gene Takagi’s Nonprofit Law Blog. In a long post about L3C’s, Takagi points to the way this business model could enable the newspaper industry to not totally go the way of the dodo and the much-missed passenger pigeon:

….Sally Duros reported in the Huffington Post (Feb. 9, and Feb 26, 2009), newspapers are dealing with a current lack of capital caused by investors turning “news-gathering into Wall Street product.” While certain papers still make money, “The problem is it cannot make enough profit for all the games normal for-profits get involved in.” (Lang commenting on the Peoria Newspaper Guild). Historically, newspapers are not considered nonprofits. However, the Program-Related Investment Promotion Act, if passed, would expand charitable purposes to include newspapers. In Illinois alone, under the 5% payout required by foundations, Illinois foundations invest $17M each year in programs serving a social purpose out of their $535 combined assets. The L3C scenario would thus provide an opportunity for newspapers to make “enough” money. Lang stated, “What we are looking at is the newspaper as a self-sufficient entity. It will not be a high profit entity.” Unlike other current options, the L3C is sustainable, allowing newspapers to tap into the $17M available for PRIs while the L3C’s social purpose business model continues to realign newspapers with their community service mission. The Communications Workers of America and other reporters have raised similar discussions for other struggling newspapers, for example, in Seattle and Minnesota.