Profits v. Purpose: Hybrid Companies and the Charitable Dollar

Abstract

Social entrepreneurship -- a catch-all term meaning harnessing business practices for social good -- has attracted people who want to “do well while doing good” for decades. Advocates of the idea have succeeded in blurring the boundaries among legal ownership types and inspired nonprofit/for-profit joint ventures, public-private partnerships, and the widespread privatization of traditional government functions and activities. The most recent manifestation of this trend is the creation of hybrid non-profit/for-profit firms. In the United States, the Low-Profit Limited Liability Company (L3C) is growing, and there are similar firms in the United Kingdom and Canada. In this paper we address the narrow, legal justifications for L3Cs in the U.S., as well as the broader justifications for hybrid organizations. We then identify four types of problems raised by the L3C and, perhaps to a lesser extent, other models: 1) their internal, legal incoherence; 2) the risk to charitable assets and potential for inappropriate use of tax subsidies; 3) the problematic assumption that for-profits are more efficient than nonprofit or government alternatives; and 4) the potentially inappropriate use of government imprimatur. However, recognizing the increasing and unyielding limits on the ability of nonprofits to raise capital, we concede that L3Cs may well offer a valuable route to capital while avoiding conversions to for-profit ownership.