March 20, 2008 | Read Time: 4 minutes
As the lines between the nonprofit and for-profit worlds blur, charity and business leaders continue to look for new legal structures that are better suited to such blended activities than current designations.
The topic was one of many discussions here at a meeting of more than 530 nonprofit executives gathered this week for the Social Enterprise Alliance’s annual conference. The meeting focused on ways in which nonprofit groups can diversify their sources of revenue by charging fees for the services they provide and starting businesses related to their charitable activities.
One proposed legal structure discussed at the meeting — the low-profit, limited liability company, or L3C — is designed to increase the number of loans or other so-called program-related investments that foundations make to businesses set up to advance social missions. The goal of the new structure would be to make it easier for foundations to find those businesses. Organizers also hope that an influx of foundation dollars would spur additional private investment.
To gain the proposed designation, which would be a new type of limited-liability corporation, the venture would have to state in its organizing document that its primary mission was charitable, and that making money was a secondary concern.
The entity would have to pay taxes on profits, but, unlike a charity, it would be free to distribute those profits to owners or investors.
Vermont’s House of Representatives has passed a bill that would create the new designation, pending approval by the state Senate. Backers are also trying to get legislation passed in Georgia, Michigan, Montana, and North Carolina, said Robert M. Lang Jr., chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, in Cross River, N.Y.
Mr. Lang believes that only one state has to approve the new designation for it to be available for businesses across the country.
If, for example, L3C’s become legal in Vermont, “you can be in Idaho and you can form a Vermont L3C and do business in Idaho,” he said. “Just like now, how many people have Delaware corporations?”
Mr. Lang hopes having a designation for social-purpose businesses will encourage foundations to make program-related investments in such ventures.
IRS guidelines offer examples of program-related investments that foundations can make in businesses that offer a significant social benefit — such as a factory in a depressed inner-city neighborhood that employs local workers, said Marc Owens, a Washington lawyer who previously headed the IRS division that oversees tax-exempt groups. But, he said, of the relatively few PRI’s that foundations make, almost all are loans to nonprofit groups.
Mr. Owens and Mr. Lang said that the proposed designation’s strength is as an identifying mark, and that its simplicity and the fact that it would be only a small modification of a limited liability corporation would help get it passed, whereas other proposed hybrid structures have faltered.
Additional information about the L3C concept is available online.
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The more complex a charity’s business venture becomes, the greater the need to bring in businesspeople with specialized expertise, Audrey Higbee, director of the Riverbend Furniture Company, in Springfield, Mass., told conference participants.
The Center for Human Development, a social-services organization in the same city, has run Riverbend for 25 years as a way to provide meaningful work for people with severe and chronic mental illnesses. After an early switch from birdhouses to furniture, the company developed a steady business selling its wares to other nonprofit organizations that run group homes.
But several years ago, orders from social-service charities began to decline. Cuts in government funds led some groups to hold back on new furniture purchases as long as they could, and at the same time, other organizations were taking clients to retail furniture stores so they could pick their own furniture. “We realized that we were going to have to find another market,” says Ms. Higbee.
Riverbend began investigating the higher-volume college and university market, but the company quickly realized that it would need more expertise.
Serendipitously, Ms. Higbee was able to hire two salespeople and a cost accountant from a company that sold to the college market but was going out of business. Riverbend also hired a production manager to oversee operations and make sure that the business could fulfill the larger contracts it would be bidding on.
Charities can sometimes be tempted to go it alone, says Ms. Higbee. “With Riverbend, we kind of reached a limit to that, and we had to bring in people who knew what they were doing in the market we were getting into.”
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The Social Enterprise Alliance is starting to form local chapters to help charities interested in business ventures find like-minded groups in their areas. The first two are in St. Louis and in the Baltimore-Washington area.
Information will soon be available on the alliance’s Web site.
