Friday, April 20, 2007

Old structures support new structures

The Council on Foundations has announced its 2007 legislative agenda, Philanthropic Partnerships. In addition to clarification of regulations on donor advised funds and supporting organizations, the Council will be encouraging federal legislation to allow foundations to make program-related investments in L3Cs.

What is an L3C, you ask? It is a Low-Profit Limited Liability Company, which is described as an enterprise with a charitable purpose that generates a modest profit. I first heard about them last year in an article in Worth Magazine. You can request a white paper on the concept by writing to The Mannweiler Foundation, L3C, P.O. Box 361, Cross River, NY 10518.

The concept has been introduced in the North Carolina legislature as part of State Senate Bill 91 seeking to create economic incentives for "endangered manufacturers," AKA the furniture manufacturing industry.

Huh? Why does the COF care about the furniture industry? Me thinks there is more here than meets the eye. The COF states (see their text below) that this change would actually only require regulatory action by the IRS, but given the "newness" of the L3C concept, congressional legislation would facilitate such action from the IRS.

  • Perhaps this is an effort to get the Council members more involved in social enterprise and hybrid organizations?
  • Perhaps it is simply about encouraging 1) more PRIs and/or 2) philanthropy for economic development?
  • Perhaps it is the former colonist's response to Mother England's Community Interest Companies (CICs)?
  • Perhaps it is simple recognition of the blending of public, philanthropic and commercial practice?
  • Or perhaps it is something else altogether.

Anyway you slice it, its quite interesting.

Here is text from The Council:

Proposal: Support federal legislation that would recognize the Low-profit Limited Liability Company (L3C). The L3C is proposed to be a limited liability company, created under state law to generate modest profit while carrying on a business that has a charitable purpose.

Position: The Council supports federal legislation that would allow foundations to make program-related investments to Low-profit Limited Liability Companies (L3C's).

Rationale: The L3C is designed to facilitate the flow of philanthropic capital to economic development activities such as creating jobs in economically depressed areas. It does this by simplifying the complex analysis required before private foundations can undertake program-related investments. The proposed legislation would benefit community foundations and other public charities engaged in economic development by allowing them to contribute to a business that is structured primarily to accomplish a charitable purpose.

The L3C would be limited to business activities that significantly further a charitable or educational purpose and that do not have a significant goal of producing income or capital appreciation. Therefore, foundations should be able to invest in or make grants and loans to L3C's and have the payment count towards the foundation's payout. Further, they should be able to do so without the need for the analysis that currently supports program-related investment decisions.

Current Legislation: State legislation to create the L3C has been introduced in North Carolina. The bill language closely tracks the requirements for a private foundation to make a program-related investment. The IRS could recognize L3C's through the regulatory process. However, due to the novelty of the concept, the IRS is unlikely to do so without congressional approval in the form of legislative recognition of the L3C. Working with outside counsel, the Council is determining which elements to recommend including in federal legislation to ensure that the L3C provides the intended benefits without creating a significant new opportunity for abuse.

No comments: