Traditionally, entrepreneurs had two choices of organizational structure when designing a start-up: for-profit or non-profit. I’ve been through both. Too often, people consider the distinction between the two as good versus evil. A non-profit’s mission is to support a social cause. That’s good. A for-profit’s mission is to maximize shareholder wealth. That’s bad.
It’s not quite that simple—particularly for social entrepreneurs.
A social entrepreneur is someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change. In other words, rather than bringing a concept to market to address a consumer problem, social entrepreneurs attempt to bring a concept to market to address a public problem.
What’s the issue? Raising start-up capital.
How do entrepreneurs do it? Unless they’re bootstrapping, they often turn to VC’s or angel investors for help. But, VC’s and angels are just greedy profit-mongers who’d never consider a social enterprise, though, right? Wrong. Typically, these folks are just serial-entrepreneurs who invest resources (money, time, and expertise) in early-stage entities, bring them into the black, cash out, and repeat. They’re builders and designers, who, like all of us, have bills to pay. Outside of venture philanthropy, these resources have been largely unavailable to the social sector. Until now.
Enter the L3C: “a new legal form of business entity that was created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures while simplifying compliance with Internal Revenue Service rules for ‘Program Related Investments’.”
The L3C is an intriguing structure and sets the stage for a new era in social enterprise. This “low-profit” LLC opens the door for private equity (and accompanying expertise) to combine with foundation dollars—a powerful notion in the rising tide of social change agents. Although Virginia isn’t among the growing number of states that already passed legislation to establish the entity, there is a workaround for those eager to get started (similar to Delaware Corporations):
- L3C’s can be filed in Vermont, Michigan, North Dakota, Wyoming, Utah, the Crow Indian Nation in Montana, and Illinois (Vermont is the most commonly used, according to the NonProfit Times).
- Next, simply file as a foreign corporate entity in Virginia.
Image: Social Edge