Foundation Friday: Not MP3, L3C!

Thanks to the colleague who brought to our attention the current push to offer foundations the option of making Program Related Investments not only in nonprofits but in Limited Liability Low-Profit Companies, catchily terms "L3Cs."  We don’t pretend to be sophisticated enough to understand all the implications of such a plan–for that we refer you to the Council on Foundations and Worth Magazine–but we have a couple of thoughts:

  • if there’s profit, even low profit, then charities aren’t getting as much benefit as they could from program-related investments.  Note that the idea includes dividends to investors who "would then make further PRIs," but how is this to be enforced?  And if the dividends are to go back into nonprofits, wouldn’t it be simpler just to leave them there in the first place?  Yes, of course, we want to "make the pie higher" (as our President would say) but is this the way to go about it?
  • in the same spirit (and in the Nonprofiteer’s usual bomb-throwing mode), it doesn’t seem to her that loosening restrictions on foundations is the way to increase philanthropic capital.  Instead, let’s tighten those restrictions to make philanthropies give away 10% of endowment each year, or at least 7, in lieu of the current 5.  That would provide a lot of capital in a hurry, for PRIs or out-and-out grants.

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One Response to “Foundation Friday: Not MP3, L3C!”

  1. Gene Finley Says:

    I really had not heard much about LLLCs so when I read your e-mail, I looked further.

    I see benefits and problems. New organizations struggle with a lack of start up capital. Cash to operate is often scarce and a reserve is out of the quesiton. Many with good causes find themselves bogged down in cash shortages and unable to do the work they set out to do.

    Foundations are reluctant to fund equity in these charities because it is feared the charity will spend the money on operations. The LLLC provides a method of funding the capital needs, office furniture, phones, computers, cash flow without that funding being used for operations. This corporate form might make those funds more available.

    As the organization makes a “profit” it is expected to pay the funds back or forward to other LLLCs. It’s kind of the Oprah Winfrey pay it forward thing I guess. The non profit world is getting a bit aggressive for me to believe this will happen without IRS intervention. You think credit counselling was a big move for the IRS. Wait until the LLLC not passing profit forward ship hits the sand.

    Another thought is the form might be useful as a subsidiary of a non profit. A non-profit can form an LLC and have it disregarded by the IRS only if it is in materially the same business. If on the other hand, that non profit forms another non profit, it limits it’s ability to control what is essentially an affiliate.

    This form might be well used to avoid unrelated business income tax while allowing the parent organization to segment risk through subsidiares.

    From a finance standpoint, this plan creates neither an investment or a loan. The investment is probably not an asset for the balance sheet because I suspect foundations won’t be very successful at getting the money back and it will be next to impossible to support the foundation’s current value which in my book makes current value zero. It’s not a loan because the LLLC has no obligation to pay the loan back unless they’re successful.

    I think they have a good direction and a bad plan for proceeding at this point.

    Two rules come to mind. First, the foundation should not carry the “investment” on the books but should treat it as an expense and second, the foundation should not be able to accept a buyback of the equity. If the spirit of the plan is to be actualized, the money should in fact be paid forward to the next stuggling charity.

    Another thought, insiders of an LLLC must fall under private benefit and private enurement tax code.

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