Friday, June 19, 2009

The Low-profit Limited Liability Company

BusinessWeek continues its excellent coverage of social entrepreneurship with a profile of Bikestation, a bike transit station management company. Like many nonprofits, Bikestation ran into some financing problems at the end of 2007.

Bikestation's board decided the best way to meet growing demand and expand the venture was to turn it into a for-profit company. "We just didn't have the resources to expand the mission and the vision further," says Andréa White-Kjoss, who joined the nonprofit as CEO in 2004.

The article goes on to discuss the complicated licensing arrangements that the for profit company ended up reaching with the old nonprofit, which exists now mostly as a holding company; it's a complicated relationship that only a lawyer could love. This brings up the really fascinating part of the article. Because many nonprofits are having financial trouble because of the credit crunch (see this excellent piece, which links to a Johns Hopkins survey of foundation lending patterns), there is a growing demand for hybrid business models that allow for a greater range of financing options. Going the for-profit route has clear benefits because of our developed institutions of entrepreneurial finance, but many nonprofits fear their credibility will be damaged along the way.

While there is a tendency to view the world in binary terms, entrepreneurship creates both private gain and social value. However, there is a general resistance to this view and many believe that only nonprofits create social value. Our legal code reflects this separation and has not kept up with the rise of social entrepreneurship. One recent exception is the creation of the low-profit limited liability corporation (L3C). From BW:

One new form, known as the Low-profit Limited Liability Company (or L3C), is intended for companies that put their missions before profits. The structure lets them qualify for "program-related investments" from foundations—loans or investments that further a foundation's goals and also may yield financial returns. First adopted in Vermont in April 2008, the L3C is now also on the books in Michigan, Utah, and Wyoming. There are 53 L3Cs in Vermont and a handful in other states so far.
There are several good discussions of L3Cs around the web. As always you can try Wikipedia, but also see the Nonprofit Law Blog and Gaebler's Resources for Entrepreneurs. L3Cs are currently limited to a handful of states and the Crow Indian Nation, but several other states are moving in a similar direction. An interesting complement to this legislation is B Lab, which certifies, through standards, that companies do indeed have a social mission that is embedded in corporate governance documents. This certification is meant to differentiate firms from the growing number of green and cause marketing campaigns.

Corporate governance is becoming a vibrant field and it would be good to see the Office of Social Innovation put out a white paper on some of these changes and new movements.

I find all of this fascinating and have been doing some research on the organizational structure of firms and the implications for social entrepreneurship, so this article captured much of what's been on my mind lately. Any thoughts?

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