There is a term that is burning through the entrepreneur community: social enterprise. These new businesses are focused more on doing social good than turning profits. There is a significant influx in these businesses springing up. Grand Rapids has even recently seen the opening of HUB Grand Rapids, a club dedicated to social enterprise. One term that seems to be accompanying these social enterprises is the low-profit limited liability company or L3C. So what is an L3C and what does it do?
With the tough economic times that the United States has experienced a generation of entrepreneurs that want to develop a business but they also want to improve the world around them has been created. This has led to the increase in social enterprise. The L3C allows these social enterprises the protection and tax benefits of a limited liability company but at the same time these businesses can receive grants and investments from certain foundations to satisfy their 5% payout obligation—the program-related investment (PRI). Also, unlike a non-profit, L3C’s can derive income without fear of losing its status.
Social enterprises are limited in a way because for an investor it’s higher risk with lower financial returns. Traditionally this put a ceiling on how much these enterprises could grow and thus limited the amount of impact that they could have on their community. The L3C allows them to attract the much needed capital infusion from foundations that have to meet the payout requirements so these social enterprises can grow and have the impact that they dream of.
There are some special rules for forming your L3C. Michigan Law specifies that the L3C’s article of organization must state a specific purpose that meets the IRS requirements of a charitable purpose and the business cannot have a significant profit driven purpose. In addition to this, the L3C cannot participate in political or legislative activities as defined by the IRS. The L3C must also have an operating agreement that meets the PRI requirements.
The L3C is a great entity to have in the mix. Not only does it provide more avenues for foundations to invest in the social sector, but it provides a means for social enterprise to grow at a faster rate and reach wider range of people and entities. But just like non-profit entities, L3C’s need to be formed correctly and need to be treated as a business. It is easy for members of an L3C to get caught up in making the social impact and lose track of the business aspect of the entity. Advisors and groups like HUB Grand Rapids can help keep you focused and take the correct business steps.
Sources: “Social Enterprises: A New Business Form Driving Social Change” by Marc J. Lane of the American Bar Association
“How Social Entrepreneurship is Changing Chicago (and the World)” by Jeff Segal of Technori