Vermont Poised to Recognize Businesses That Are Created to Offer Social Benefits

Vermont is poised to become the first state to officially recognize a new kind of business designed to allow charitable ventures to more easily attract foundation money and other kinds of private capital. Advocates of the new business structure — what they describe as “a for-profit with a nonprofit soul” — say it has the potential to attract billions, if not trillions, of new dollars to organizations doing good works around the country.

The new business entity is to be called a low-profit limited-liability company, or L3C, and Vermont’s governor is expected to sign into law soon the bill creating the designation.

An L3C, a variation of a limited-liability company, would operate like a for-profit business generating at least modest profits, but its primary aim would be to offer significant social benefits, such as providing jobs in an economically depressed area. Such business models already exist: The Vermont law would give them a name and, its advocates hope, both encourage the creation of more socially conscious businesses and attract more money to them.

Hybrid Groups

In Vermont, the Castanea Foundation, an operating foundation that works to preserve farmland, is mulling plans to establish L3Cs under the new law that would set up local food-production efforts, like a cheese-aging facility.

“As an economic-development tool, the L3C may be a great vehicle for us,” says Tim Storrow, the foundation’s executive director.

Another key goal of the L3C idea is to increase the number of loans or other so-called program-related investments that foundations make to businesses created to advance social missions. Having a special legal structure for the hybrid groups will help grant makers identify potential loan recipients, and, the idea goes, spur additional private investments.

“Foundations with their PRI’s will assume the riskiest parts of the investments, opening the door for trillions of dollars of private capital that otherwise would have gone elsewhere because the investment was too risky,” says Robert M. Lang Jr., chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, in Cross River, N.Y.

Mr. Lang, along with a small group of tax, law, and charity experts, came up with the L3C concept, and the Mannweiler Foundation plans to organize the first L3C under the Vermont law. The new entity will advise and support the creation of L3C’s nationwide. As with limited-liability companies, Mr. Lang says, only one state has to have the new designation for it to be available for businesses across the country.

Even so, a handful of other states are considering new L3C legislation similar to Vermont’s, and some foundation officials may be interested in pushing for federal legislation, or, at least, for Internal Revenue Service guidelines.

“The L3C is structured to meet the federal requirements for a PRI, but it may not be sufficient in and of itself,” says Janne Gallagher, vice president and general counsel of the Council on Foundations. “The new designation is great for foundations to identify possible new areas for their PRIs, but we still have to ensure that the IRS will accept them.”