“Low-Profit” Corporations Enable Social Venture Capital

A “low-profit limited liability corporation” is allowed to make money, but can also accept tax-deductible loans. Michigan,Vermont, Wyoming, Utah and Illinois passed laws this year defining a new type of corporation called an L3C, creating interesting new investment incentives and legal protections for socially-conscious market entities.

Chicago tax attorney Mark Lane, who helped get low-profit legislation passed in Illinois, suggests that we think of the L3C as a structure for socially-conscious venture capital.

In this video, Lane painstakingly presents the details of this new type of corporation. On first reading, it does seem like a plan that only a tax attorney could love. The L3C is, in some sense, little more than a carefully designed IRS category — but it could channel a lot of new money to social entrepreneurs. The trick is that private foundations would be allowed to deduct certain kinds of loans to L3Cs just like donations to non-profits, but the L3C would hope to make a profit and eventually return the money with interest. Given that foundations have to give 5% of their net worth to charity every year anyway, it’s a huge win for them to give it as a speculative loan rather than a grant.

The “low-profit” structure could also ease a classic dilemma between public and private operations. Public entities and non-profit corporations are legally obligated to operate in the public interest, but can be horribly inefficient due to the lack of competitive pressures and, often, shielding from financial accountability. Meanwhile, private corporations live or die on their efficiency but can be sued by investors if they fail to maximize raw profit. The L3C is something in between: a business that is required to operate in the public interest and can accept of tax-deductible investments, but can also pay a profit to partners and investors.

This hybrid funding model may prove especially useful in the production of public goods, the things that benefit everyone but are difficult to get anyone to pay for. The L3C has been proposed for groups working in education, small industry, biotech, arts, and journalism.

For more, see overviews from Social Earth and the Non Profit Law Blog.