Self-authored comparison between L3C and not for profit/non-profit

1. What a L3C is in summary:
* “Significantly furthers the accomplishment of one or more charitable or educational
purposes”
* “No significant purpose of the company is the production of income or the
appreciation of property”
* “No purpose of the company is to accomplish one or more political or legislative
purposes”
* The name of the company “shall contain the abbreviation L3C or l3c”
L3Cs would typically involve businesses that serve socially beneficial purposes and
have some economic viability
Similarities:
social conscience
must bring in more money than it spends
dual bottom lines financial and mission
program outcomes are difficult to assess
participation of volunteers
L3C/For-profit
501(c)(3)/Tax Exempt
Taxes
Items of income and
expense passed through
to members. Tax-exempt
members treat their share
of income as exempt or
subject to unrelated
business taxable income
(UBTI), depending on the
character of the income
(Wexler 566).
Not taxed on income,
unless itʼs UBTI. Can offer
tax deductions to donors
(Wexler 566).
Management and Control
The operating agreement
provides for a
management committee or
a single manager, typically
elected by the members
(Wexler 566).
Divided ownership chance
for capital gain.
Board of directors controls.
Some corps have
members who elect
directors or appointers
who then choose a
director (Wexler 566).
The governing board has
both oversight and
supporting roles.
Capital and Loans
Membership contributions;
set up specifically to
accept PRI money more
easily (Wexler 566).
Charitable contributions
and grants. Easily eligible
for PRI loans (Wexler 566)

2. L3C/For-profit
501(c)(3)/Tax Exempt
Distribution of Funds Not
Used for Programs
Distributions to members
and grants for charitable
purposes (Wexler 566).
Grants for charitable
purposes (Wexler 566)
Liquidation (Sale of entity/
assets)
Net assets to members
and to 501(c)(3) charities.
(Wexler 566).
Net assets to another
501(c)(3) with like exempt
purposes (Wexler 566).
Social Mission
Requires accomplishment
of one or more charitable
or educational purposes.
Must be formed only
because of those reasons.
Required. Activities that
provide services or good
not otherwise available.
Investment
SRI + NPO + market rate
investors all under one
roof for profit.
Attracts investment
because of social mission
and ability to provide a
return.
Risk and award can be
divided unevenly.
Attracts investment
because of tax
deductibility and social
mission.
PRIʼs (private foundation)
Can accept more easily
Cumbersome process,
requiring private letter
rulings for a program
funded by a nonprofit and
foundation.

3. L3C/For-profit
501(c)(3)/Tax Exempt
Fully allowed as long as
social mission is not
compromised.
Secondary goal
(Americans for Community
Development FAQs).
Do not have to maximize
profit.
"In a not-for-profit
organization, the profits go
back into the organization
-- either in the form of
added program funding or
by adding to the reserves
or capital funds...Many
NPOs fail because they
didn't plan to earn more
than they spent and
because they didn't put
their profits in reserve
accounts for the proverbial
rainy day." http://
www.poynteronline.org/q/?
id=A159737
Price of services
Can be provided at
whatever the market will
allow. Price mark-ups
allowed.
Provided below market
rates or no detectible
markups that seek to
maximize profit.
Main Advantages
Attracting program related
investments.
Branding and marketing
benefit that might open up
access to funding,
contracts, and investment
(Wexler 568).
Provides an “in” to the
culture of financial decision
making.
Great if services require
grants and contributions to
operate.
More aligned with the
thinking and purposes of
education, government,
and other nonprofit
institutions. The 501c3 is
required by most donors,
government granting
agencies, and foundations
for gifts and grants.
No pressure to make
return for investors.
Focus on exempt only
activities that are only
reaching towards social
mission
Profit
Activities

4. L3C/For-profit
Main Disadvantages
501(c)(3)/Tax Exempt
Loss of collaboration and
funding that requires
exempt activities.
Pressure of return/more
focus on finances.
“Isnʼt an existing
accountability system of
IRS 990s, state
regulations, etc.” Kate Barr
“I fear most institutional
funders will remain too risk
adverse to jump in.” Adam
Huttler
Limited access to capital
for growth when lots of
services are shifting to the
government and the large
national organizations.
Regulatory structure can
be very restrictive on
movement and growth of
organization.
It can be hard to manage,
govern, and sustain, itʼs
awkward for enterprises
that plan a profit (even a
small one), and it tends to
be permanent even when
permanence isn't required.

5. L3C/For-profit
Reasons for a combination
501(c)(3)/Tax Exempt
Most clients who talk about a hybrid structure, however, are considering
pairing a charitable organization that can receive grants and contributions
and a for-profit that can use investment capital to develop a product or
service and then provide that product or service to the charity at a fair
market value rate. As illustrated below, the two most complicated issues
that typically arise in the hybrid model are (1) taking substantive and
procedural steps to avoid any excess benefits, and (2) ensuring that the
activities of the for-profit and the charity can be sufficiently separated so
that the activities of the business are not attributed to the charity, thereby
compromising its tax-exempt status.
A for-profit combined with an exempt entity to carry out a social
enterprise makes sense as follows:
• when only a portion of the activity can qualify for exemption;
• when capital is required both in the form of private investment and from
grants and contributions; and
• when the founders want to build a business to sell, but also are willing
to dedicate some portion of the enterprise to charity in perpetuity.
Whenever an enterprise considers a hybrid structure, it must, at a
minimum:
• be prepared to delineate clearly the activity that will rest in the exempt
versus for-profit structure; there must be a logical and practical way to
divide the activities;
• be cognizant of, and be prepared to comply with the procedures to
avoid, intermediate sanctions under section 4958; the enterprise must
develop and follow clear conflict of interest policies and disclose financial
interests to the disinterested members of the nonprofit board of directors;
• give up legal control of the exempt entity to those who will not benefit
financially from the for-profit business; the disinterested members of the
tax-exempt board need to be individuals who will understand their
independent fiduciary duty and not simply rubber-stamp the decisions of
the for-profit founders; and
• ensure that the private investors, particularly any venture capitalists,
understand that they do not control, and cannot control or benefit from,
the exempt side of the enterprise.
Segregation of exempt vs. non-exempt activities is a very important step to take. If
CRF's non-exempt activities reach too significant of a level, CRF's exempt status is
in jeopardy. With that said, the exempt vs. non-exempt activities analysis does not
mean that there is a blanket prohibition against CRF from engaging in activities such
as the sale of merchandise or other goods and services. The point of inquiry under
the federal tax law is whether the activity is in furtherance of CRF's exempt
purposes. Peter Kulick