Making R.I. fertile for social ventures

Rhode Island lawmakers recently passed legislation designed to attract a broader range of investments in limited-liability companies with nonprofit missions. The measure creates a new corporate structure – the low-profit, limited-liability company, or “L3C” – with the policy goal of making Rhode Island the Silicon Valley of social ventures.
With the new law going into effect July 1, now is the time to consider whether the L3C is the right choice for your business.
An L3C is a hybrid of a for-profit and nonprofit organization and is currently available in eight other states. Like a for-profit LLC, L3C offers its owners limited personal liability for the actions and debts of the entity. It also provides management flexibility, the benefit of pass-through taxation, and is taxable like any other for-profit business.
Like a nonprofit organization, an L3C is organized to significantly further the accomplishment of one or more charitable or educational purpose. Unlike a nonprofit organization, however, an L3C is free to sell equity and memberships interests, as well as distribute profits, after taxes, to owners and investors.
The L3C structure is designed for social ventures, which attempt to confront social, economic or environmental challenges in a systemic, sustainable way. Unlike nonprofit organizations, however, social ventures do not rely on charitable donations to fund their operations. Rather, they sell equity or membership stakes through private investment capital with the goal of building self-sustaining solutions to social ills.
Social ventures generally target market and investment inefficiencies. Market inefficiencies inevitably lead to large, underserved populations here in the United States and around the globe. Social ventures can build self-sustaining business models by finding innovative ways to provide critical services to these underserved populations The sizeable gap between the rate of return for “normal” investments (perhaps 5 to 8 percent, with no guarantees) and charitable donations (approximately minus-100 percent guaranteed, with variations depending on tax treatment) means potential investment dollars remain on the sidelines.
Social ventures can lure capital from investors willing to accept lower rates of return if they are satisfied with the venture’s social mission.
The social-venture attracts investors, not by guaranteeing exorbitant and likely unrealistic returns, but by offering a chance to make some profit while doing something good. The social venture attracts the nonprofit director, not by focusing on a wholly different mission, but by offering a model that is self-sustaining and free from the constraints of relentless charitable fundraising.
How does the L3C structure benefit social ventures? The L3C structure helps social ventures attract private capital investments in two ways – the first more immediate, and the second in the future.
The L3C structure is an effective tool for marketing a social venture to investors interested in investing in socially responsible businesses. By forming as an L3C, the business is saying a few things about itself.
The L3C says that its primary purpose is a charitable or educational purpose, similar to a nonprofit organization. It also says that no significant purpose of the entity is dedicated toward the production of income or appreciation of property. When an investor considers investing in a company named “Business Name, L3C,” it is aware that the venture is focused primarily on a social good and only secondarily, if at all, on making a profit.
The L3C structure also offers the possibility of a unique opportunity to obtain program-related investments (PRIs) from private foundations. Federal law currently allows private foundations to make PRIs in for-profit businesses, but only after incurring significant time and expenses. Bipartisan legislation submitted in the House would substantially reduce the cost for private foundations to make PRIs in L3C-structured social ventures. Increased use of PRIs in L3Cs would allow for tiers of investment tranches permitting L3Cs to attract additional private capital.
One of the most promising L3Cs started to date is The Paradigm Project, L3C. Formed under Colorado’s L3C legislation, Paradigm Project’s purpose is to find, fund, and further social venture opportunities that leverage philanthropic and capital market interests in generating sustainable economic, social and environmental value within developing world communities.
Paradigm Project currently has early-stage projects, starting at 400,000 stoves, in each of Kenya, Haiti and Guatemala, within communities that are locally characterized as the poorest of the poor.
L3Cs provide a versatile structure for businesses seeking to succeed in the growing social-venture community. The social, economic and environmental challenges of the 21st century demand flexible, innovative and sustainable solutions.
Social ventures endeavor to meet these demands by blurring the line between for-profit and nonprofit to create a sustainable business model that serves a critical social mission. Creation of the L3C structure is an important step to helping these businesses flourish in Rhode Island. •


Christopher R. Blazejewski is an attorney at Sherin and Lodgen LLP. He is also a Democratic member of the Rhode Island House, representing Providence. Tobias Lederberg is an attorney at Lederberg & Blackman, LLP. He is also chairman of the board of directors of Social Venture Partners Rhode Island.

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