Out of Fashion?

by Deborah Davidson, vice president of governance education and research

 

I went to a meeting at the Urban Institute this week called the “Annual IRS Form 990 and State Charity Regulation Meeting.”  Many of the attendees were from state Attorneys General offices who belong to an organization of charity regulators called the National Association of State Charity Officials (NASCO). A pretty serious audience, to say the least.  While sessions like this can sometimes be a bit dry, I am always looking for provocative observations or questions as they relate to nonprofit governance.

This meeting’s provocation came from a discussion on hybrids — those quasi-nonprofits that are actually for-profits, but with a social benefit aim. The most common ones we’ve learned about are the L3C, or Low-Profit Limited Liability Company, and the B Corp, or Benefit Corporation. According to a panelist, the day of the L3C has passed, in favor of the B Corp. Or, as the speaker so elegantly put it, “L3Cs are so 2010.”

While no one is ready to sound the death knell for the L3C, Oregon Assistant Attorney General Elizabeth Grant theorized that the business model of the two entities will continue to favor the B Corp over the L3C for two main reasons: 1) Foundations have never really gotten behind the idea of program-related investments for L3Cs, and that was supposed to be their primary benefit; and 2) the B Corp laws allow the board to take the interests of stakeholders beyond the shareholders into account; shareholders who are unhappy that their profits are not maximized (a common shareholder suit) can only receive injunctive relief, not financial, which gives the board extremely wide latitude.

So, what do you think? Has the B Corp taken over for the L3C as the hybrid of choice? And if so, is the nonprofit sector in trouble, or is this an opportunity, or something in between? Let us know what you’re hearing from your networks.

For more information on hybrids, read this BoardSource topic paper.

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2 Comments

  1. Mary Evslin

     /  May 18, 2012

    Foundations are not usually edgy organizations. They are used to hiring consultants to invest their money in very, very safe financial tools. Most I have spoken with are just becoming comfortable with the idea of a PRI that might not earn any money. My guess is that we won’t see a lot of PRIs until they see how those of us using them succeed or fail. That may take a few more years. L3Cs will hopefully be there when the foundations are ready.

    Reply
  2. Really? Tell that to the over 600 L3Cs that have been formed. But some of the comments do not surprise me. Elizabeth Grant shows her lack of understanding of the field she supposedly regulates. The B and the Benefit are welcome additions but they really cover another space. The L3C carries a fiduciary responsibility for the organization to further a charitable mission while B and Benefit merely protect management if they decide to focus on more than just profit. As Mary Evslin says foundations embrace new ideas slowly. The PRI is an idea that is becoming the talk of the foundation world. Even the Obama administration has just come out saying that foundations need to be encouraged to make more PRIs. The next step is as awareness increases is to look at what they can fund and how to make sure they are complying with IRS regulations. At that point the L3C moves front and center. But PRIs are not the only way to fund L3Cs. If Elizabeth were in Washington DC on May 21 and 22 at the Americans for Community Development conference entitled “The L3C – A Tool for Our Times” she would be learning about something that is alive and well and doing good without the help of state regulators. What a novel idea – people doing good through free enterprise solutions without the need for any more regulation than any LLC.

    Reply

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