Social Entrepreneurship and the L3c Structure: Bridging the Gap between Non-Profit and For-Profit Ventures

Article excerpt

ABSTRACT

One of the most challenging problems facing social entrepreneurs stems from the tension between providing adequate returns to investors while also fulfilling their social mission. This is especially the case given that many social ventures are established as non-profit entities. Recently a growing number of states have enacted legislation allowing for the creation of Low Profit Limited Liability Corporations, or L3Cs. In this paper, we review the L3C organizational structure and outline its benefits and potential weaknesses to social entrepreneurs.

INTRODUCTION

Social entrepreneurs encounter many of the challenges that entrepreneurs of market-based ventures face when trying to attract investors, such as locating potential funding sources and getting investors to review and buy into a potentially money-making idea. However, finding investors willing to take a chance on ventures sacrificing some profitability for the social good is an enormous challenge, even for entrepreneurs who have started other successful ventures (Spors, 2008). Indeed, because many social ventures are founded as non-profit entities, their financial stability and fundraising constraints can greatly impede their growth and success in fulfilling their social mission. In light of these challenges, research suggests that the most successful social entrepreneurship enterprises involve creative financing solutions (Short, Moss, & Lumpkin, 2009).

Historically there have been several structural options available to entrepreneurs in general, including the Limited Liability Partnership, Limited Partnership, Limited Liability Company, S corporation, C Corporation, or a Business Trust. Within each of these different organized entities, United States federal law provides each organization with separate and distinct procedures in accounting for its assets in relation to its tax liability (Pope, Anderson, & Kramer, 2010). However, each of these forms presents their own unique challenges to social entrepreneurs. One recent innovation that can potentially minimize some of the fundraising and financial challenges facing social ventures is the recently developed corporate designation called the Low-Profit Limited Liability Company or L3C. In contrast to these other forms of business, the purpose of the L3C structure is to bring together a mix of investors that can include foundations and other nonprofits, trusts, endowments, pension plans, individuals, corporations, and governmental entities to achieve social objectives, while operating in accordance with for-profit metrics. In other words, the L3C format creates a bridge between nonprofit organizations and for-profit entities. An L3C may be formed as a new entity or it may be formed by converting an existing entity. Moreover, foundations are finding that the L3C structure enables them to make non-grant investments such as loans, loan guarantees, equity purchases or other investments that advance the foundation's philanthropic purposes (Welch, 2009).

The choice of business structure plays a crucial role in the taxation of an enterprise. Indeed, beyond the tax implications, the structural form may be one of the most important decisions facing social entrepreneurs because the traditional forms and social mission of social entrepreneurial ventures often promotes a tension. That is, it is difficult to strike the balance between the levels of profitability investors demand while simultaneously creating social value (Spors, 2008).

In the rest of this paper, we investigate the growing number of social ventures that have launched to serve both domestic and international social and environmental issues. We then expand on the challenges social ventures face in terms of securing financial resources, and the challenges they face in their attempts to grow and fulfill their mission while maintaining their nonprofit status. Next, we provide a description of the L3C business form. …