Activitely Ambivalent About the L3C

I was invited to testify in support of the L3C (Low Profit, Limited Liability Company) at hearings in Maryland this Spring. And the challenge is that I am…how else to say it…”actively ambivalent.”

The L3C  is a state-level filing option for social enterprise companies that is gaining traction across the country. Recognized in at least 9 states and 2 tribes/nations, the category is gaining support and was introduced in eleven other states introduced related bills last year, including my current home state of Maryland. The number of L3Cs operating in the country is 331.

I say actively, because I am interested and understand the impulse. Mine is just the kind of professional service biz that, because it was formed to respond to the technical assistance needs of organizations serving public purposes, likely would file as L3C if it were available in Maryland.

But ambivalent, too, because I am not convinced it’s necessary and sometimes I believe it may be a distraction. Operating a company without shareholders and making loans and investments at lower rates for community benefit already is permitted under tax and corporate law. Private foundations have been permitted to make loans for community benefit purposes, called PRIs (Program-Related Investments), (to tax-exempt groups as well as to profit-making entities for decades. Very few actually do.

More colleagues in the philanthropy world than not will say that the process of making loans is unfamiliar (and therefore risky or irrelevant to their grantmaking work). The social enterprise movement and an L3C or an expanded Maryland Benefit Corporation that embraces social purpose LLCs likely will encourage some new private foundation investment and fresh revenue options for hybrid small scale operations, but my guess is, not many. I am not convinced by the argument that more private foundations will make more PRIs to nonprofits with L3C arms or directly to L3Cs for social change work. It will take more than a new company model. Basically, the L3C model is interesting, but probably not necessary legally.

On the other hand, some respected and rockin leaders doing amazing work have built successful social ventures in my state and elsewhere do believe the L3C could free up more capital for them to grow. I hope that is the case, because social enterprise is creating good jobs, generating revenue, and contributing to more sustainable local economies—and offers the potential to do even more in communities nationwide. Hybrid legal structures, creative policy incentives, and public-private exploration, collaboration, and experimentation can enhance the environment for broadening or deepening investment in social enterprise. And more capital for social enterprise is what we all want!

I do support an expansion of current LLC law and practice to support entities formed specifically or primarily for—and possibly even in balance with—social/community benefit. I’m just actively ambivalent about whether the L3C model is the best way to do it.