Hybrid Business Model Gives Social Causes Access to Venture Capital

Contents
The For-Profit with a Nonprofit Soul
Why a Hybrid Organization is Needed
What an L3C Can Do for Your Organization or Community
Future Implications

By Tom Triplett, Principal Consultant with Fieldstone Alliance. Tom specializes in helping nonprofits develop financial strategies for long-term sustainability.

A SIGNIFICANT LEAP has been made toward creating in the United States a new hybrid business model that brings together some of the best features of for-profit and nonprofit organizations.

On April 30, 2008, the governor of Vermont signed a law allowing the “low-profit limited liability company” (L3C) as a business structure. This law has national significance because these companies can now be incorporated in Vermont whether or not the businesses actually operate in that state.

The For-Profit with a Nonprofit Soul
The L3C occupies a unique niche between the for-profit and charitable sectors. Like a for-profit, an L3C is run like a regular business and is profitable. Unlike a business, the primary aim of the L3C is not to make a profit, but to achieve socially beneficial purposes: profit is a secondary goal. 

Why a Hybrid Organization is Needed
Where is a nonprofit to go to get money to fund growth, buy a building, or start a new initiative? Grantmakers—who want a direct measurement of results to know if they’ve invested wisely—give mostly restricted, small, and short-term program grants. Few banks are willing to provide loans, at least not without exorbitant interest rates. The alternatives? Reinvest your profits and grow really slowly or hope for an operating grant. Enter the L3C.

Enactment of the L3C law is a huge step forward for the movement to broaden the base of funding sources available to nonprofits. The goal of laws like this is to bring together access to equity capital that for-profits now have with the social missions inherent in nonprofits. Such hybrid corporate models already exist in Canada and Great Britain, and advocates have long sought their introduction here.

One of the L3C’s principal advocates, Robert Lang of the Mary Elizabeth and Gordon B. Mannweiler Foundation, sees the act as primarily a way to facilitate program-related investments (PRIs) by American foundations. However, it is likely the act will have broader significance as other private sector investors become comfortable with investing “equity” in L3Cs.

What an L3C Can Do for Your Organization or Community
L3Cs would typically involve businesses that serve socially beneficial purposes and have some economic viability, but have difficulty attracting capital because of the high-risk, low-return, (or both) nature of their operation. Here are a few examples: ¹

• A factory that employs much of a town’s work force may need to replace obsolete equipment at great cost, leading its owners to consider moving or closing. An L3C could buy the factory, rehabilitate and re-equip it to be "lean and green," and lease it at very low rates. Hundreds of jobs could be saved or created making the company an engine of economic development.

• A hotel in a deteriorating business district would have some ability to generate revenue, but not enough to attract sufficient capital to begin operations. An L3C could get the necessary capital to buy and refurbish the property.

• Historic buildings could perhaps be saved and turned into office and retail property, but the costs of renovation may be so steep that the projected rents cannot support market-rate debt incurred to finance those renovations. 

In all of these situations, an L3C could undertake the high-risk, low-return business activity involved in these situations with a view to combating economic deterioration, destruction of historic property, or job loss.

Future Implications
More work and fine-tuning will be needed as these new hybrid companies take their place in the universe of nonprofits and for-profit structures. For example, many states do not currently permit limited liability companies (LLCs) of any type to be formed as nonprofits, and these laws will need to be changed.

And, although the Vermont law was drafted to make IRS qualifications easier, the Service will no doubt weigh in on this and related issues soon. Finally, the act is somewhat ambiguous on how it defines permissible profit-making by the companies.

One of the results of Vermont's enactment of the L3C law is that the state will likely be seen as a haven for nonprofit incorporations nationally, just as Delaware has positioned itself as the favored locale for many for-profit incorporations.

Where to Learn More

More about "Low-Profit Limited Liability Companies"(L3Cs)

• Americans for Community Development
  Detailed information about L3Cs and the Vermont legislation as well as Robert Lang's work.
• The Office of the Vermont Secretary of State
  This is where you can register an organization as an L3C.
• Blog by Kate Barr of Nonprofits Assistance Fund
  

Related Organizations

• B Network
• Fourth Sector Network
• Green MBA

Current capital funding resources
If you're more of a traditionalist, here are organizations that provide capital funding to nonprofit organizations.

• Good Capital
  Provides growth capital to social enterprises in a range of fields including workforce development, healthcare, education, fair trade, organic food, and non-profit services.
• The Calvert Social Investment Foundation
  Lends to more than 200 community organizations, including loan funds, microfinance institutions, affordable housing developers and social enterprises.
• Prudential Financial’s Social Investment Program
  Invests in the areas of economic development and education. The program will only consider proposals that do not qualify under mainstream investment guidelines.
  

Fieldstone Alliance

Books:
Financial Leadership—Protect and grow your nonprofit’s assets.
Venture Forth!—Reduce your dependence on grants. Find, test, and launch a successful venture.

Consulting services:
Our expertise includes developing financial strategies for long-term sustainability. For more information, please contact Tom Triplett at 651.556.4504 or ttriplett@FieldstoneAlliance.org. Also, see Tom's recent articles:

Collaborating with a For-Profit: Some Risks but Huge Potential
Managing the End of a Funding Relationship

Tom Triplett
Fieldstone Alliance

June 18, 2008

¹ From the Americans for Community Development web site (http://americansforcommunitydevelopment.org). Reprinted with permission.

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