Tuesday, January 19, 2010

L3C Newspapers?

Scott Russell, who blogs for MinnPost.com, reportsthat Robert Lang -- the zealous promoter of the L3C concept -- was recently at the University of Minnesota promoting the idea of converting for-profit newspapers (which are cutting staff and going under in droves) into L3Cs.  According to Lang, the newspapers could sell private foundations on the idea that a healthy press is essential to a healthy democracy (I seem to remember that from high school civics) and could use the L3C structure to elicit program related investments. 

A year or so in, it's not at all clear that the IRS is going to support the L3C concept, nor is it clear that hybrid social venture organizations are going to be attracted to the L3C form.



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I recently consulted with a group of journalists from a now-bankrupt newspaper who are proposing to create a company to do independent journalism on a for-profit basis, using philanthropic and PRI from several foundations for start-up capital. We talked about choice of entity a lot, with representatives of the foundations present, and concluded that the L3C offered no advantage to the venture or the investors and had some significant disadvantages, not the least of which is the contrast between what the promoters of L3C's claim and what the IRS and other authorities are saying. Ironically, the foundations were more concerned about making a PRI to an L3C than they were about making an investment in a C Corporation or a "regular" LLC. Frankly, the "overselling" of L3C's makes them nervous.

Personally I think the L3C has great potential value as a "brand" for companies that need to signal that profit is not a significant priority, but from a legal point of view, the fact that it has to conduct "charitable" activities and no significant purpose can be the making of money presents some serious problems. As a practicing attorney who represents a lot of social enterprises, I don't think the L3C will gain much traction until the IRS and state courts resolve some of the lingering questions that have been discussed here and elsewhere. And I don't see that happening any time soon.

Posted by: Allen Bromberger | Jan 20, 2010 8:33:26 PM

I agree that "the fact that it [an L3C] has to conduct 'charitable' activities and no significant purpose can be the making of money presents some serious problems", but it shouldn't.

While many interpret the “non-significant money making clause” as a way for L3C’s to cover up the profits they make with a good social purpose, the clause actually does more to benefit the owners of the L3C with protection (in theory) if they don’t maximize profits.

It’s unfortunate that Foundations are put off by the “oversell” of the L3C. The following example makes clear the type of business mindset that an L3C might carry.

EX: A newspaper sells local advertising to cover its costs and produce a small profit. It is committed to local businesses. Part of it's mission is that it only wants to sell local advertising.

Years pass, the company grows and becomes more popular. Branches all over the country now sell the paper and their own local advertising with it.

While an LLC would be forced to sell to the F500's that are now attracted to the large-scale newspaper (They pay more, thus maximizing profits), the L3C can continue to sell to local-only advertisers (for a lesser profit, but greater social good).

Also, it is important for foundations to understand that for any company, LLC or otherwise, to GROW they have to have some of their own assets to put down. By allowing L3C’s to turn a profit, they are no different—profits will help them to grow and further leverage their social purpose. While NFP’s can also grow, this comes with increased money from outside foundations, not their own capital they've been accumulating over the years (illegal for NFP’s).

Posted by: Chadd Hippensteel | Jun 15, 2010 9:42:39 AM

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