I’m swimming against a current of alphabet soup with this post, publicly expressing some skepticism about the hot topic of last week, the L3C, a forum about which was livestreamed on newplay.tv: L3C and the Arts: Understanding the Potential of Low Profit Limited Liability Companies. I remain skeptical of the L3C’s potential to impact the arts infrastructure in a net positive way. If you have 3 ½ hours, I encourage you to watch the archive video of the forum. But if you don’t, here’s a brief primer on the L3C: The L3C is a special type of limited liability corporation (LLC) authorized by about a dozen states. Like a regular LLC, an L3C is a for-profit corporation but one with a charitable/educational mission, leading to a legally acceptable “double bottom line” of profit AND mission. Foundations can invest in an L3C via a loan or even capital investment (with no guaranteed return) if the L3C’s mission is in alignment with the foundation’s as a “program related investment” (PRI). There has been a lot of excitement about the possibilities the L3C form opens for the arts and culture sector, some of that excitement coming from me at times. The L3C seems at first blush to be a boon to entrepreneurs with a conscience, people who want to start profit-making enterprises that balance mission with profitability. And, it is that.
But who (or what) benefits from the L3C form? The chief beneficieries appear to be nonprofit foundations and existing (larger) 501c3 nonprofits. Foundations can “invest” rather than “give” and thereby get some financial return rather than none, as would be the case if giving to a 501c3 nonprofit corp, with less reporting burden than if they had invested in a regular LLC. Thus the L3C is, according to attorney Marc Lane, “particularly attractive to impact investors.” But the giving or PRI requirement for foundations remains at 5% so, in the zero sum game that is the bottom line of an annual budget, if the L3Cs gain through PRI, there are likely 501c3 organizations that are losing out on the granting side.
The other potential beneficiaries of the L3C form are 501c3 organizations (usually large) that form wholly or partially owned subsidiary for-profit L3Cs. Thus, the large 501c3 reaps a benefit. The small start-up independent entrepreneurial artist does not necessarily benefit here. The L3C as a subsidiary of a 501c3 is a concept that has excited the larger social entrepreneurship community because it enables nonprofit social service providers to undertake some profitable activities that support their core mission without being subject to unrelated business income tax (UBIT). But, the L3C does not specifically benefit the arts and culture sector.
I agree with Fractured Atlas’s Adam Huttler, who says, “I think the enthusiasm and excitement about the idea is a little bit disproportionate to the actual value it provides, at least right now.” Yes, it’s a new corporate form; yes, it’s another tool in the entrepreneurial toolbox – and I generally favor more flexibility over less flexibility. But is the L3C the panacea that will pull the arts and culture sector up by its bootstraps? Not right now. If the arts and culture sector advances because of the L3C form, it seems it would be as a byproduct of it, rather than a direct beneficiary. Let’s watch for developments.