There are many entrepreneurs that are caught between doing social good and financially benefiting from their endeavors. Do you Incorporate - LLC, or do you 501c3? Now with a relatively new legal entity you may be able to do both in one legal structure.
My eyes were opened to this new legal structure via a business development meeting on Chicago's near south side at the Christopher Foltz Collaborative, L3C. There I met with Christopher in an abandoned doctor's office turned into frenetic brain trust. He talked of changing the world and he wasn't afraid to speak about making money either. This was a relatively refreshing viewpoint for me since I don't think everyone needs to be a "Gandhi" in order to bring positive change to society. I actually believe market solutions, in most circumstances, are the most efficient and sweeping ways to bring change.
After our meeting I did some research into L3C structures and it is certainly something every entrepreneur should consider as they think about corporate formation. A L3C is a low-profit limited liability company that was created to bridge the differences between non-profit and for-profit endeavors. The corporate structure meets IRS requirements for direct program contributions by private not-for-profit foundations. These foundations account for $50 billion in US annual donations.
At the same time, a L3C is allowed to make and retain much of its profits. In most states at least 5 percent of profits must be given to social causes (check with your state). The L3C will also need to have some stated social purposes. This profit allowance gives the L3C the ability to seek out traditional funding sources from private equity, convertible loans and traditional loans. Donations from private individuals are not tax deductible to a L3C as they are with 501c3 organizations.
A L3C can leverage donations to enhance small margin returns to encourage private investment. For example, let's assume a product is to be introduced that has a social benefit but for purposes of enhancing distribution its price and therefore its financial return is reduced. Let's say, $100,000 is needed. If a particular project would yield only a 5 percent return on that money, then it may struggle to find for-profit financing. Instead, an L3C could find foundational funding for say, half the project, $50,000 in this case. It can now seek half the for-profit funding, $50,000 instead of $100,000 and it can offer twice the yield on the investment, 10 percent.
In this case, the foundation achieves its social benefit goals for $50,000 instead of $100,000 and the for-profit achieves a higher financial return with half the capital at risk. The entrepreneur is able to fund his full project, participate in some of the financial return and provide a social benefit.
Voila, The Social Enterprise is born.
Please note that L3C structures are not available in all states and, of course, you should consult with an attorney in understanding this new type of legal structure. If you are intrigued, I found the following Harvard Business Review article on the topic very helpful, "A New Approach to Funding Social Enterprises", by Antony Bugg-Levine, Bruce Kogut and Nalin Kulatilaka. You can get it on Audible for $2 here.
If you're looking for inspiration on building Social Enterprises then "Rippling: How Social Entrepreneurs Spread Innovation throughout the World" by Beverly Schwartz is an excellent and entertaining read.
Liesel Pritzker Simmon's $50 million pledge to fund global for-profit, social enterprise networks.