Clouded by ambiguous legal
structures and funding models, the world of social entrepreneurship is foggy at
best. The relationship between business and social endeavors can be described
numerous ways, but the “tension” or “conflict” surrounding them remain
constant.
In 2007, Bill Gates delivered a
commencement speech addressing the opportunities presented by the tension
between business and social endeavors. Gates challenged the Harvard graduates
to devise “a more creative capitalism[i]” to
“stretch the reach of market forces so that more people can make a profit, or
at least make a living, serving people who are suffering from the worst
inequities[ii].”
The state of Vermont was the first to enact legislation to bridge the world of
business and social impact investing together[iii].
In 2009, Michigan built legal framework within the state for social enterprises
by becoming one of nine states with L3C legislation.
L3C is an acronym for Low-profit Limited
Liability Company. This type of business entity is appealing because it offers legal
and tax flexibility traditionally found in the LLC structure while also engaging
nonprofit foundation investment funds. The L3C is “designed to qualify as a
recipient of Program-Related Investments[iv]”
(PRIs) which is beneficially for traditional investors, but more so for
foundations. The L3C removes the difficulties and overpriced IRS requirements
foundations once faced when investing in for-profit businesses that aligned
with their organization’s purpose. Foundations already receive tax benefits
from PRIs to other nonprofits, but the L3C’s primarily appeal lies in the
potential of the investment to result in a reliable flow of capital. The L3C is
a solution to numerous problems faced by social entrepreneurs, but this legal structure
is not without problems.
The L3C defaults in focusing
primarily on the legal framework and investment potential without much regard
to measuring social impact or the frameworks’ ambiguity. There are three major
problems created by L3Cs. The first is an issue of redundancy; the cycle of
investment for low profits may not produce the flow of capital desired by the
nature of an L3C. The second is deception. Despite its socially-conscious
mission, L3Cs are not tax-exempt. L3Cs operate like standard LLCs for federal
tax purposes. Stuart Levine states “L3C’s don’t work unless there is a change
in federal tax law. In other words,
L3C’s are a little like Oreo-Tycin-Myacin - the wonder drug for which there is
no known disease[v].” The third issue highlights the natural
tension between charity and business. Levine states “L3C’s raise difficult
issues of fiduciary duty and the inherent conflict between ‘charitable’
purposes and ‘business’ purposes. At the
least, these conflicts cannot be dealt with via a quick-fix state statute[vi].”
All of these problems stem back to
the essence of low-profit or nonprofit organizations and their social focus.
Measuring social impact and profits is similar to comparing apples to oranges,
while both may be fruit they offer different opportunities for impact. While it
may seem plausible to conclude the L3C is a broken model, it is important to
remember that the L3C is not a business or funding model. The L3C legislation
provides a seemingly intentional ambiguous legal framework that can lead to business
and funding models for these hybrid entities.
The Stanford Social Innovation
Review (SSIR) briefly chastised two hybrid funding models before excluding them
from the list of the ten funding models for nonprofits and social organizations.
The first model involves a nonprofit receiving support by a separate income
generation venture. In this model, the profitable ventures are separate and
distinct from the core-mission related activities. The second model, which
correlates to the L3C model, is based on a B2B or consumer-direct
fee-for-service model. This model is does not rely heavily on fundraising or
government support. The SSIR supports these models as functioning, but
withdraws its support for scalability within these models. Based on a 30 year
study of 144 nonprofits that grew to $50 million a year or more in size during
the course of the study, none of the nonprofit organizations represented
functioned within these hybrid models[vii].
Inc. Magazine offers a third hybrid
model the authors of the SSIR did not consider. The third hybrid model
integrates the non-profit with the for-profit. The classic example is the
relationship between Mozilla Foundation and Mozilla Corporation. Create in
2005, Mozilla Corporation became the for-profit subsidiary of the Mozilla
Foundation. In 2011, Mozilla Corporation brought in $104 million. The Mozilla
Foundation is the sole shareholder to the Mozilla Corporation and brings more
than $200,000 in charitable donations to the table[viii].
Other companies like Story Pirate and Parent Earth have emerged as the
newcomers to watch in the high-growth arena of social entrepreneurship.
Lapwosky offers three factors to support scalability within this proven
functioning hybrid model.
1. The
nonprofits unrelated business income threatens its nonprofit status
2. The
for-profit needs help managing its philanthropy
3. Each
entity needs something offered by the other
The for-profit world has developed
a sophisticated language to communicate funding strategies, while the
non-profit world has maintained a poverty of language. Combining the business
(for-profit world) with social endeavors (non-profit) world relies on the
ability to both establish a common language between the two worlds and develop
a new language for those social entrepreneurs who exist in the gray area. In
non-profit organizations and social causes, the end user is rarely the buyer which
makes identifying the economic engine a separate step. The issue of customer
versus beneficiary continues to block potential communication between the two.
[i]
Gates, B. (2007, June 7). www.news.harvard.edu.
Retrieved October 3, 2012 from
http://news.harvard.edu/gazette/story/2007/06/remarks-of-bill-gates-harvard-commencement-2007/
[ii]
Ibid
[iii]
Vermont Secretary of State: Corporations Division. Low-Profit Limited Liability Company. Low-Profit Limited Liability
Company Retrieved October 3, 2009 from http://www.sec.state.vt.us/corps/dobiz/llc/llc_l3c.htm
[iv]
Najarian, N. R. (2009). Michigan leads
the way with a new corporate form – the l3c. Retrieved from
http://www.detroitbusinesslaw.com/2009/07/20/michigan-leads-the-way-with-a-new-corporate-form-the-l3c/
[v]
The Nonprofiteer. (2011, March 17). “L3C”
spells “caveat emptor”. Retrieved from http://nonprofiteer.net/2011/03/17/l3c-spells-caveat-emptor/
[vi]
Ibid
[vii]
Stanford social innovation review (provide full info)
[viii]
Lapowsky, I. (2011, May 2). The Social
Entrepreneurship Spectrum: Hyrbids.Retriveid from www.inc.com/magazine/20110501/the-social-entrepreneurship-spectrum-hybrids
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