Hybrid Philanthropy - The New Era of Charitable Giving

The line between for-profit and nonprofit entities is blurred by the "low-profit limited liability company", or L3C. 

This new structure, about a year old as of this month in Michigan, is an intriguing proposition.  Nonprofits, private foundations, government, pension funds, private investors all collaborating and investing funds in a limited liability company designed specifically for potentially profit-making projects that have a philanthropic purpose.  The "low-profit" name is misleading - the L3C venture can produce unlimited profit, but can't have profit as it's primary purpose.  The creators designed it for patient capital, hence the "low-profit" choice of words.

The L3C model is designed to appeal to private foundations ("PF")  - capital contributions qualify as Program Related Investments.

A Program Related Investment is counted as part of the 5% each PF is required to distribute each year.  It is also excluded from asset values that go into the computation of the annual 5% dollar amount.   A PRI has three statutory requirements:  alignment with PF mission; profit is not the primary purpose; and, no lobbying.  The three statutory requirements are included in the L3C formation documents, thereby providing assurance to PFs that their investment should qualify as a PRI without feeling the need to seek an expensive private letter ruling or legal opinion.

Along with the L3C, other examples of PRI are: (most common) loans to nonprofits that are in alignment with a PF's mission, loan guarantees to nonprofits that are in alignment with a PF's mission, and (much less common) direct investment in traditional for-profit entities that are in alignment with a PFs mission.

Contributions by private foundations could in theory absorb most of the risk of a project, thereby attracting private capital and pension dollars in higher tranches with higher required rates of return.

We love this idea - bringing collaboration, profit metrics and financing to philanthropic causes opens the door to real problem solving and real capital resources.

Contributions to an L3C are not deductible as charitable contributions.  Founders who are looking for investment dollars versus grants, and profit-sharing potential may choose the flexibility of the L3C over the rigidity of a 501(c)(3) for social purpose initiatives.

The following Michigan L3Cs have been formed since January 2010.  Our firm is presently working on a prototype document for mixed use development in areas like the Eastern Market.

administrative services (Divine Help Services, Unique Support Specialists); athletics (Liga del Futvol); environmental (Beyond Profit Venture Partners, EcoZoic, Tri-Green Development); education (Top Urban School Facilities, TEF Franklin, Signature Hope); technology (Ardent Cause, BroadMap, Cool School Technologies, SEEDR, V02 Funding); fundraising (The Giving App); disabled services (KI Medical Device Manufacturing); business ventures(Ingenuity US); job training (Ingenuity, New Center Career Center, Signature Hope); spiritualism (SBNR); community relations (EcoZoic, Peace Meals); promote philanthropy (Mission Throttle); collection and preservation (Michigan History Magazine); music programming and recording (Community Records); lending and financial counseling ( Southwest Lending Solutions).

A closer look at some of these organizations leads us to conclude they are private business people using the L3C vehicle as a nonprofit marketing "brand" versus a platform for attracting investment.  But, the branding aspect of the L3C is another one of its touted benefits - similar to the "B" Corporation "brand".