Low Profit Limited Liability Company Research Articles

Hybrid Legal Entities for Social Enterprise as Social Innovation

Social innovation has become a new way of solving social problems and a force of change for the people's better quality of life. It essentially involves empowerment of the people with a view to enhancing their potential for competition with the private sector and reduced dependence on the state sector. Social enterprise is now recognised as a form of social innovation, because the concept is based on a combination of a social benefit goal and the achievement of financial sustainability. This paper relies on a documentary enquiry, paying particular attention to the exploration of hybrid legal forms for social enterprise, especially the U.S. Low-Profit Limited Liability Company (L3C). This hybrid legal entity is taken here as a practical form of social innovation to solve social problems. The paper has followed a qualitative analytic mode making use of various types of documents obtained from many sources. Social innovation does not simply involve the availability of new strategies, approaches, or methods. It also requires appropriate legal environment. For this reason, the law itself needs to adjust, i.e. making itself innovative, so that it creates a legal setting favourable to social innovation, such as the one emerging in the United States in the form of hybrid legal entities initiated to promote social enterprise. Legal development in this way may be conceived of as legal innovation to solve social problems. Keywords: social innovation, social enterprise, law, Low-profit Limited Liability Company (L3C).

Truth revealed: Challenging the mythical narrative of the low-profit limited liability company

This article reviews the body of literature concerning low-pro t limited liability companies and conducts a critical analysis of the "aws" frequently cited in the literature as problematic within the form. Analysis of the low-pro t limited liability company (L3C) is conducted in the larger, global context of social enterprise, with emphasis on the social purpose company of Belgium and the community interest company of the United Kingdom as points of comparison. Findings demonstrate that the most commonly stated criticisms of L3Cs are in fact inaccurate. A deeper critical analysis of the form reveals that this choice of entity is advantageous on several levels for both social entrepreneurs and private charitable foundations. This piece furthers the literature by dispelling the myths surrounding L3Cs, providing counterarguments to the existing criticisms of the form and providing the business community with accurate information regarding the bene ts of L3Cs for social enterprise

A digital platform for ethical advertising and hybrid business models for news organizations: are they greening methods for ‘news deserts’?

This article suggests that the adoption of hybrid business models coupled with the establishment of an ethical advertising platform could help counter the emergence of news deserts. The latter are geographic areas and policy issues lacking coverage because of the crisis of the commercial model of news provision. Three clusters of characteristics are used to streamline and compare business models: (1) revenue models, (2) patrons and their motives, and (3) legal frameworks for the incorporation of the organization. Hybrid business models are designed by mixing the principles underpinning the Benefit Corporation or the Low-profit Limited Liability Company (L3C), with the basic characteristics of commercial and non-profit news organizations. The term ethical advertising refers to promotional activities that non-profits and other organizations dedicated to social goals normally undertake, including marketing, fundraising, or public-awareness campaigns. Based on data published by the Internal Revenue Services, this article argues that a digital platform for ethical advertising could face a demand worth over $1 billion a year. Additionally, this platform could effectively match non-profits’ demand for an audience with a pro-social attitude with non-profit and hybrid news organizations’ need for additional revenue streams.

Strategic, Legal, and Accounting Challenges for Social Enterprises

Purpose-This study is to trigger an integration of strategic, legal, and accounting issues relating to the formation and operation of social enterprises. It provides a conceptual model to facilitate debate, research, and practical approaches to aspiring social entrepreneurs. Design/Methodology/Approach-The study utilizes a secondary research method. It reviews literature from classical business and entrepreneurship to law and accounting journals and overcomes the complexity of topics to create a holistic approach to social entrepreneurs' challenges and opportunities. Findings-It provides a vantage point of the distinctive nature of social entrepreneurs and entrepreneurial motivations. It explores the advantages of legal and accounting challenges in forming a Low-Profit Limited Liability Company (L3C). In particular, it delineates the intricacies between an L3C, a limited liability company (LLC), and not-for-profits. Finally, it offers a conceptual model for further research and a set of practical implications. Research limitations/implications-It invites investigation of the strategic formation of social enterprises. Specifically, exploring the external environment in conjunction with strategic behavior, capabilities, law, and accounting challenges. It provides a conceptual model for further investigation of the significant dynamics of social enterprises. Practical implications-The creation of the conceptual model provides a guiding start for research, debate, and practical guidelines for aspiring entrepreneurs by integrating strategic, legal, and accounting challenges and opportunities. Social implications-The proliferation of social enterprises provides solutions to social challenges while entrepreneurs generate profit. It provides a dimension to a socially conscious person to engage in enterprises. Finally, it may provide a new paradigm for new capitalism that deliberately combines social and financial benefits. Originality/Value-This study develops a conceptual model to explain the complexity and dynamics of social entrepreneurship and provide exposure to social enterprises' legal and accounting challenges and opportunities.

OBLIGATORY CSR VIA SOCIAL ENTERPRISE CORPORATE BUSINESS ENTITIES

Corporate Social Responsibility (CSR) is primarily a philanthropic concept. The underlying principle that CSR is merely a business voluntary endeavor has become the main problem in the implementation of CSR. One of the developments of CSR enforcement is through the Corporate Code of Conduct (CoC) which is a standard procedure in a company conducting its business activities on the basis of economic, legal and ethical factors. Recently, there are a new business entities known as Low Profit Limited Liability Company (L3C), Benefit Corporation (B Corps), and Community Interest Company (CIC) introduced in the UK as a new vehicle to promote social well-being through business activities, which is believed to be more effective than corporate social responsibility, whereby these new business entities enforce CSR as an obligatory obligation rather than a voluntary act. Main purpose of this article is to examine legal jurisprudence behind establishment of these business entities. This research adopted the doctrinal legal research which focus on review of the regulation and policy contained in primary sources such as, case law, and statutory provisions. Reference will also be made to secondary sources such as textbook, journal articles, report, seminar papers, as well as data from official website.

Law & Entrepreneurship in Global Clinical Education

As clinical legal education (CLE) continues to evolve and prepare practice-ready lawyers, and governments worldwide focus on the multilayered impact of technology, automation and artificial intelligence, there is a pressing need to examine law and entrepreneurship through the lens of global clinical legal education. The range of issues include: corporate social responsibility, disruptive technologies, microbusiness, social entrepreneurship, social impact investing, the creative economy, sustainable local economies, cooperatives and shared work, and inclusive entrepreneurship.Indeed, new legal entities like benefit corporations and low profit limited liability companies (L3Cs) have emerged to address contemporary legal needs and in the United States, the notion of an entrepreneurial mindset is prominent. Many of today’s law students are Millennial generation, ages 18-34, while others are digital natives who have not known a world without technology.Business law clinics (BLCs), also referred to as transactional clinics, representing for profit, nonprofit or nongovernmental (NGOs) organizations and social enterprises aim to support the growth of entrepreneurial ecosystems while promoting social and economic justice. BLCs teach law students substantive law, practical skills and professional values. Indeed, BLCs with a social and economic justice perspective can help law students, the next generation of leaders, to develop critical analytic skills and insights into how entrepreneurship supports and sometimes hurts human rights and civil society efforts.Part one of this article examines the evolution of global CLE in western countries like the United States, United Kingdom, Canada, Australia, and in Georgia and Croatia. Part two discusses a more recent phenomenon in CLE, the emergence of BLCs, which expand the clinical experience beyond the courtroom to the boardroom, and the differences and similarities between litigation and transactional legal clinics. Part three examines the rise in BLCs globally, and contains case studies of the global experience in transactional CLE with perspectives from Georgia, Croatia, Australia, Canada and the U.K. Part four considers the unique pedagogical and programmatic aspects of BLCs, such as redefining “practice-ready,” teaching Millennials, and collaboration as a lawyering skill. Part five reflects on the significance of BLCs now. In Part six the article concludes by looking to the future of BLCs in a global context. The article also includes an Appendix 1 with BLC Lawyering Competencies and Learning Outcomes and Appendix 2 with a Checklist for Starting or Re-Imagining a BLC.

Early Lessons in Social Enterprise Law

The growing body of law that is developing alongside the international proliferation of social enterprises has had its share of successes and failures. Experiences from the American low-profit limited liability company, the British and Canadian community interest company, and attempted cross-border implantation of the American benefit corporation in Canada offer valuable lessons for legislators contemplating new social enterprise laws to address the needs of their constituents. This chapter considers these early lessons and provides a framework for the strategic implementation of social enterprise laws when warranted within a nation’s corporate landscape. While one may assume that the implementation of social enterprise laws can only help to advance social progress, this would be an incomplete – and, at times, incorrect – answer. With proper strategic implementation, hybrid alternatives could become the new legal tool that ignites the growth of social innovation from the private sector. But social enterprise laws could also thwart mainstream reform efforts. They could circumvent resources traditionally used toward the non-profit sector, and they may simply promote a neoliberal agenda and the shrinking of government responsibility. Without strategic implementation and brand awareness, the odds are likely that hybrid corporate legislation will be left unused – a lost opportunity. Policymakers should take these concerns into account throughout the process of introducing new social enterprise laws within a jurisdiction.

Law & Entrepreneurship in Global Clinical Education

As clinical legal education (CLE) continues to evolve and prepare practice-ready lawyers, and governments worldwide focus on the multilayered impact of technology, automation and artificial intelligence, there is a pressing need to examine law and entrepreneurship through the lens of global clinical legal education. The range of issues include: corporate social responsibility, disruptive technologies, microbusiness, social entrepreneurship, social impact investing, the creative economy, sustainable local economies, cooperatives and shared work, and inclusive entrepreneurship. Indeed, new legal entities like benefit corporations and low profit limited liability companies (L3Cs) have emerged to address contemporary legal needs and in the United States. the notion of an entrepreneurial mindset is prominent. Many of today’s law students are Millennial generation, ages 18-34, while others are digital natives who have not known a world without technology. Business law clinics (BLCs), also referred to as transactional clinics, representing for profit, nonprofit or nongovernmental (NGOs) organizations and social enterprises aim to support the growth of entrepreneurial ecosystems while promoting social and economic justice. BLCs teach law students substantive law, practical skills and professional values. Indeed, BLCs with a social and economic justice perspective can help law students, the next generation of leaders, to develop critical analytic skills and insights into how entrepreneurship supports and sometimes hurts human rights and civil society efforts. Part one of this article examines the evolution of global CLE in western countries like the United States, United Kingdom, Canada, Australia, and in Georgia and Croatia. Part two discusses a more recent phenomenon in CLE, the emergence of BLCs, which expand the clinical experience beyond the courtroom to the boardroom, and the differences and similarities between litigation and transactional legal clinics. Part three examines the rise in BLCs globally, and contains case studies of the global experience in transactional CLE with perspectives from Georgia, Croatia, Australia, Canada and the U.K. Part four considers the unique pedagogical and programmatic aspects of BLCs, such as redefining “practice-ready,” teaching Millennials, and collaboration as a lawyering skill. Part five reflects on the significance of BLCs now. In Part six the article concludes by looking to the future of BLCs in a global context. The article also includes an Appendix 1 with BLC Lawyering Competencies and Learning Outcomes and Appendix 2 with a Checklist for Starting or Re-Imagining a BLC.

Renewed hope for the low-profit limited liability company

PurposeThe purpose of this paper is to challenge the notion that low-profit limited liability companies (L3Cs) are an ineffective or flawed choice of entity for social entrepreneurs. Most of the literature surrounding L3Cs has been critical of the form; however, a detailed analysis shows that the form is not only still viable but also, in fact, experiencing growth.Design/methodology/approachThis paper utilizes key literature and an analysis of current L3C activity in the USA to provide a unique viewpoint on the utility and viability of L3Cs in the USA.FindingsAnalysis demonstrates that despite criticisms throughout the legal community, the L3C is experiencing recent growth and continues to be a viable choice of entity for social entrepreneurs.Practical implicationsThis piece fills a significant gap in the literature surrounding L3Cs. Much has been written about L3Cs in the legal academy, but analysis is scarce when reviewing management and entrepreneurship literature.Originality/valueThis piece furthers the literature by providing the business academy with an in-depth analysis of the legal components of L3Cs and draws research-based conclusions about the state of the form and its viability for social entrepreneurs. It is unique in that it challenges the prevailing legal opinion that the L3C form is useless and unnecessary.

Adopting Stakeholder Advisory Boards

Over the past decade, interest in socially responsible business has grown exponentially. The social business movement seeks to have firms focus on the interests of all corporate stakeholders, rather than solely the financial interests of shareholders. Coupled with the social business movement of the past decade has been the passage of social enterprise statutes by over thirty states. The social enterprise statutes provide legal frameworks for firms that seek profit alongside broader social and environmental ends. A plethora of social enterprise legal forms have been created in the United States since 2008, including benefit corporations, public benefit corporations, benefit LLCs, low-profit limited liability companies (L3Cs), general benefit corporations, specific benefit corporations, sustainable business corporations, and social purpose corporations. Despite the interest in social business and the passage of numerous social enterprise laws, the basic corporate governance framework has stayed largely the same. In both socially-focused traditional companies and in newly formed social enterprises, the corporate governance system is one that empowers directors, officers, and shareholders, but largely ignores other stakeholders such as employees, customers, vendors, creditors, the environment, and the community at large. This Article explores the shortcomings of the current corporate governance framework, reveals inadequacies in previous proposals to focus firms on all stakeholders, and proposes a stakeholder advisory board as a solution. As proposed, the stakeholder advisory board will give all major stakeholders a more direct voice in firm governance and will grant more stakeholders limited but significantly powers, without harmfully disrupting the efficiency of the board of directors. If adopted, the stakeholder advisory board will better align the corporate governance framework with the recent social business movement by including representatives of all stakeholder groups in decision-making. This proposal suggests mandating adoption of a stakeholder advisory board for large social enterprises, and encourages the voluntary adoption of a stakeholder advisory board by all firms that take their social commitments seriously.

Corporate Social Responsibility and Leadership: Legal, Ethical, and Practical Considerations for the Global Business Leader

Corporate Social Responsibility and Leadership: Legal, Ethical, and Practical Considerations for the Global Business Leader Frank J. Cavico 2014, ILEAD Academy $16.95 (soft cover), 180 pagesQuality service, quality products and good prices are the foundational pillars of success in business. However, good service, good products and good prices will not result in sustainable success unless the business is also responsible. In his book entitled Corporate Social Responsibility and Leadership, Professor Frank Cavico states that modern firms must serve the public's interest by being socially in every way possible if they are to survive and prosper in today's competitive world of business. They must go above and beyond the to act legally and morally in their pursuit of increasing corporate profits. book takes a legal and practical approach to explaining the concept of corporate (CSR) in the business environment.Corporate Social Responsibility and Leadership has a total of eighteen chapters and the introductory chapter is followed by a discussion of The Values of Legality, Morality, and Social Responsibility, where key terms are defined. For example, intrinsic values are differentiated from instrumental values; and also the terms legality, morality, and are differentiated from one another. In Chapter 3, the author distinguishes morality from by explaining the Ethical Principle of Last Resort. Chapter 4 takes a philosophical approach to by explicating intrinsic values from instrumental values.Chapter 5 traces the history of social responsibility and provides definitions of such terms as philanthropic to stakeholder and sustainability. Chapter 6 focuses on CSR in global contexts. Chapter 7 provides a discussion of the funds for the responsible investor along with information as to responsible rating organizations and websites. Chapter 8 takes a legalistic approach to the subject of by examining statutes in the United States. author points out that these constituency statutes are the legal means by which corporate directors are allowed to engage in efforts for stakeholders by going above and beyond satisfying the immediate economic interests of the shareholders.Chapter 9 discusses the benefit corporation whereby the directors of the company must consider the interests and values of stakeholders in addition to the shareholders, including society as a whole. author points out certain legal risks for directors who serve on the board of a benefit corporation. Chapter 10 discusses this new organization called the Low-Profit Limited Liability Companies (L3Cs), and the author also points out the risky tax ramifications of doing business as an L3C. …

Role of State-Level Governments in Fostering Social Innovation

This study examined U.S. state-level policy aimed at fostering social innovation. Using a web-based protocol, searches were conducted on key words: social innovation, social entrepreneurship, social enterprise, social impact, innovation, low-profit limited-liability, benefit corporations, and social impact bonds. Findings suggest states vary considerably in policy action and infrastructure that creates an environment to stimulate innovation. Policies allowing low-profit limited-liability companies and benefit corporations are primary tools, while social impact bonds are being explored in some states. Infrastructure development, including offices and committees are also used. Government can be seen as a key lever to stimulate and embed social innovation practice.

The Truth About Ben and Jerry's

In 2000 social enterprise icon Ben & Jerry's Homemade, Inc. was acquired by Unilever, the giant multinational. According to popular legend, corporate law compelled Ben & Jerry's directors to accept Unilever's generous bid - overwhelming founders Ben Cohen and Jerry Greenfield's dogged efforts to maintain the company's social mission and independence. The story of Ben & Jerry's alleged forced sale is a key fixture in debates over new corporate forms such as low-profit limited liability companies (L3Cs), benefit corporations, and flexible purpose corporations. Proponents of new forms invariably invoke the Ben & Jerry's sell-out to demonstrate the need for forms that attempt to embed a company's social mission into its legal structure. This article debunks the canonical account of that sale. It analyzes the elaborate mechanisms that Ben & Jerry's built to resist hostile takeovers and explain why these defenses, had they been invoked, would almost certainly have worked. Ironically, the full account of the sale does not make the case for new forms; rather, it illustrates how social entrepreneurs can use existing forms in creative ways to protect an enterprise's social mission - even if they later choose not to assert such protections.

Education Reform and Cross-Sectoral Financing: A Practice-Based Approach

Recently, the for-profit sector has dramatically increased its market share in the education market. Although many students who otherwise would not have received an education have benefited from this trend, there are worrisome aspects to this development. Evidences suggests for-profit education frequently fails to serve the best interest of its students. Also, for-profit education fuels the focus of public discourse on only the short- and medium-term economic benefits of education, at the expense of longer term benefits to society. One reason the long-term benefits of education tend to be ignored is because they are hard to measure. Short-term economic value is easy to quantify, and it is a value about which there is broad-based consensus among key decision makers. Public value, in contrast, is harder to measure and harder to agree on. Most theoretical frameworks tend to reinforce this shortcoming by assuming, for example, that individual, utility-maximizing agents have pre-given preferences in a relatively static institutional environment. We challenge these assumptions by focusing on a meso-level conception of practices that mediates the relationship between dynamically conceived entities — namely, macro-level institutions and micro-level individuals. Inspired particularly by Alasdair MacIntyre, we present a theory of practices built from the ground up on managerial decision-making practices. In doing so, we uncover the practical mechanisms by which myopic economic values crowd out public values. Legal structures reinforce a strict boundary between for-profit and nonprofit institutions, effectively reinforcing the weaknesses of each: for-profit institutions have good access to financing, but drive out public values; nonprofit institutions foster public values, but fail to find sufficient financing. Legal reform can address these problems by encouraging collaborative financing efforts in a way that is sensitive to the strengths and weaknesses of each sector. Low-profit limited liability companies (L3Cs), for example, offer a way for nonprofit stakeholders and for-profit investors to collaborate, but there are dangers in bringing these different sectors together. Cross-sectoral legal reform must therefore prevent economic interests from co-opting other, public-values-based practices. This could be done, for example, by placing limits on the payouts or take-over provisions of for-profit investors can receive. This would prevent economic, profit-maximizing incentives from dominating the culture of mission-driven institutions, while still allowing mission-driven stakeholders to access financing in ways that are currently not possible.

Mind the Gap: Using the History and Theory of Profit and Nonprofit Corporations to Remedy the Problems of Social Enterprise in Low-Profit Limited Liability Companies — A Theory and Practice Approach

This Article is about social enterprise. It lays out what it is, its theoretical foundation, two major problems facing it, and recommendations for how to resolve those problems. The story and the diagnosis rely on history and extrapolation. It provides an introduction to the theory of the limited-liability form, the shape of its obligations, and how those obligations respond to progress and profit. Specifically, this Article argues that low-profit limited liability companies can be sustainable forms, if they import certain procedural and organizational lessons from profit and charitable corporations. These include broad fiduciary duties, accounting separation, disclosure to the states attorney general, derivative lawsuit procedures, and appropriate dissolution provisions.That progress and profit can and do helix together is a thread that runs throughout the Article. One major division separates Parts I and II from Part III, though. Parts I and II discuss and rebut two major criticisms of L3C’s. As such, they are broadly historical, while Part III is a practical application of those experiences to running and counseling a social enterprise. These broad visions may be read separately, but are better understood when digested together. As always, the theoretical informs the pragmatic and the pragmatic reforms the theoretical. Like the topic itself, this Article on social entrepreneurship weds two potentially conflicting frameworks into a meaningful whole.

Profits v. Purpose: Hybrid Companies and the Charitable Dollar

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.

ABA Business Law Section, on Behalf of its Committees on LLCs and Nonprofit Organizations, Opposes Legislation for Low Profit Limited Liability Companies (L3Cs)

This document comprises a letter and attachment “submitted by the ABA Business Law Section on behalf of its Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities and its Committee on Nonprofit Organizations … and states our views on … a bill ‘relating to limited liability companies [and] providing for the creation and operation of low-profit limited liability companies.’” The letter and attachment “have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and should not be construed as representing the policy of the ABA.” Supported by detailed analysis of both tax and LLC law, the letter makes the following major points:• The L3C is no better than any other business form for receiving program related investments from private foundations. L3C legislation implies otherwise and we believe is therefore misleading.• Using a program related investment as part of the type of tranched financing promoted by L3C advocates portends serious risk of improper “private benefit” – i.e., using charitable assets to the benefit of private interests such as for-profit investors. “Private benefit” transactions are improper for a private foundation and imperil a foundation’s tax-exempt status. A private foundation cannot remain qualified as a tax-exempt charitable entity if the foundation has transgressed the private benefit doctrine.• In addition:o enacting L3C legislation inadvertently but dangerously signals that state law can streamline and simplify compliance with federal tax law requirements and that program related investments can be accomplished simply, quickly, and almost “off the rack;”o it is inappropriate and unnecessary to use state entity law to provide a new and potentially misleading “brand” to mark private business ventures as socially beneficial; o the L3C legislation contains a technical flaw that renders the legislation self-defeating in most instances; ando current LLC law already permits the type of ventures contemplated by the L3C legislation. [Professor Kleinberger posts this document as the chair of the L3C Review Subcommittee of the Committee on Limited Liability Companies, Partnerships and Unincorporated Entities. The letter and attachment were principally drafted by that Subcommittee.]

Sectorization & L3C Regulatory Arbitrage of Joint Ventures with Nonprofits

The raison d’etre for the nascent low-profit limited liability company (L3C) is to stimulate collaboration (“sectorization”) among government, private and charitable sectors in order to redirect for-profit capital models into the nonprofit sector. The hope is that the L3C will not only generate additional resources for charitable purposes, but also fundamentally transform business culture by signaling a more efficient way to “do good while doing well.” The L3C has been criticized for targeting only private foundation program related investments, a capital pipeline already exhausted by existing profit entity models. When compared to the existing nonprofit joint venture, the L3C emerges as a less efficient arbitrage model for stimulating profit sector investment in charitable enterprises. A comparative analysis yields instructive lessons regarding deficiencies in federal tax regulation of program related investments and joint ventures. In both cases, the federal tax rules utilize a differing “control test” to assure the exempt entity directs assets toward its charitable mission and away from private benefit to profit sector participants. This Article provides the first comprehensive comparative theory that the existing nonprofit-profit joint venture model is a more efficient solution to assuring compliance with the charitable mission when blending market returns to market capital investors. This theoretical framework exposes why L3C statutory operating procedures unnecessarily cripple profit efforts, undermine its effectiveness, and present policy dilemmas less prevalent in joint ventures where the nonprofit must exercise control over the business entity rather than simply an investment in the entity. As a result, program related investments should be scaled back and limited to determining only whether an investment jeopardizes a foundation’s exempt mission where the scale of the investment has a self-limiting role.

Low-Profit Limited Liability Companies (L3Cs)

This paper introduces the L3C form to the public affairs literature. The Low-Profit Limited Liability Company (L3C) is a new legal form of business entity emerging in the U.S. As a form of social enterprise, L3C firms use a marketplace approach to solve social problems. The L3C form represents a radical transformation of capitalist enterprise, in that a social mission trumps profit generation. The emergence of the social enterprise movement has the potential to shift stakeholder expectations about appropriate levels of corporate social responsibility. If changes in tax policy occur, private foundations could become a major source of start-up capital for L3Cs. The result would be social enterprise claiming a larger share of commercial marketplaces. This paper explores L3C opportunities and risks from a managerial perspective, with particular focus on the public affairs implications of the L3C form.

A Myth Deconstructed: The 'Emperor’s New Clothes' on the Low Profit Limited Liability Company

This article was previously titled, “The Snare and Delusion of the L3C”.In 2008, the Vermont legislature enacted and Vermont’s governor signed into the law the first “low profit limited liability company” statute. Since that time, four other states have followed, and institutions as diverse as the Federal Reserve, the ABA’s Real Property, Probate and Trust Section, and the Vermont Law School have given credence to the notion that the “L3C” is a socially beneficial add-on to the law of limited liability companies. Indeed, L3C proponents have touted the device as: (i) a break-through in charitable giving, enabling “socially beneficial enterprises” to leverage foundation money to attract market-rate investors through “tranched investing;” (ii) a simple, wise, and useful development in the law of limited liability companies; and (iii) a method destined to be fast-tracked for special treatment under the provisions of the Internal Revenue Code (“Code” or “IRC”) dealing with “Program Related Investments” (“PRI”) by charitable foundations.Unfortunately, these glowing characterizations are each flatly wrong. The “L3C” is an unnecessary and unwise contrivance, and its very existence is inherently misleading. Due to technical flaws, the L3C legislation adopted to date is nonsensical and useless. Moreover, the notion that an L3C should have privileged status under the Code is inescapably at odds with the key policies that underpin the relevant Code sections. The L3C is not on track (let alone a fast track) to any special status under the Code.Debunking “the emperor’s new clothes” should be done painstakingly, and this article therefore proceeds through several parts: (1) summarizing the L3C concept and the claims of its proponents; (2) providing background information on the limited liability company and highlighting the aspects of LLC statutes that are relevant to a discussion of L3Cs; (3) explaining the concept of the Program Related Investments; and (4) critiquing the L3C construct and exposing its fundamental flaws under several different areas of law, including the law of limited liability companies, securities regulations, and PRIs.The article concludes that L3C legislation is no “friendly amendment” to a state LLC statute. Using foundation funds to offer market-rate returns to “tranched” investors is at best a complicated device, not appropriate for “branding” and simplistic appeals to social conscience. When a foundation contemplates making a program related investment, the matter requires careful, individualized, professional assessment, not reliance on a branded template.