Legal structures define how businesses will be held accountable in the court of law.
Nonprofits are entirely different structure than pure for profit organizations. As time goes on, more and more private corporations are becoming socially aware and wanting to combine profit with some product or service that simultaneously benefits society. Nonprofit organizations exist as executors of a socially beneficial service or product. This paper will discuss the benefits and disadvantages that both of these structures face. Additionally, this paper will examine benefits of the nonprofit sector’s consideration of newer legal structures as a future platform for business.
There are many reasons nonprofits may want to adjust business as usual but, here are just a few: Experts are predicting that with the current economic environment eating away at nonprofit’s primary sources of funding (charitable donations and foundation funding), that as many as 100,000 of the nations roughly one million nonprofit organizations will close their doors in 2009.(REF)” This is the reality for most organizations across the board. The credit market and the capital market turned upside down during the economic crisis in 2008. Foundations are making fewer grants because their endowments portfolios also changed along with the recent recession. Economic turmoil affects for profits and nonprofits differently, but, it makes sense for nonprofits to plan for business cycles, booms and busts, and periods when donors just aren’t lending as much.
Nonprofits can learn from businesses and for-profits businesses can learn from nonprofits. Nonprofits and for-profits need to start working together. One alternative legal structure that allows them to do this is the L3C. The L3c legal structures are a fairly new way to fulfill a social mission. As of now, their structures is only approved in a handful of states
(although, they are recognized by all the states in the U.S. ) and up for consideration in Georgia.
“ A hybrid of a nonprofit and for-profit corporation, the L3C is run in a similar way to a for- profit company, but is like a nonprofit in that its mission is to do something for the social good.(REF)” The L3C, unlike most nonprofits, generates a profit but that is not its sole priority.
Like for-profits, an L3C is not tax-exempt, but it can seek investors and investments that are program related for funding. The IRS also puts restrictions on how much profit an L3C can make and the amount of property it can own. While 501(c)4 can lobby as nonprofit organizations, L3Cs are not allowed to engage in political work. In order to receive L3c status, the organization must make clear that fulfilling a charitable goal is the primary reason for existence. L3Cs are intended to take advantage of two major sources of capital. They can both attract capital investment from for-profit enterprises and investment by foundations.
Nontraditional for-profit investors who are willing to sacrifice market-level returns in exchange for social impact are prime candidates to provide capital investments or loans to L3Cs. Similarly, private foundations that wish to provide support in the form of a loan or equity rather than a grant may find an L3C to be attractive because the enabling legislation is written in such a way as to comply with the IRS “program related investment” or “PRI” regulations, thus eliminating the need for private letter rulings or legal opinions for such investments. PRIs can be attractive to foundations because they count toward its 5% minimum payout requirement, just as if they were grants. But if the investment is successful, the foundation could recapture the full amount of the investment, plus a reasonable rate of return, which it then must pay out again in the form of grants or more PRIs.
Existing nonprofits can also potentially…