This article from the L3C's designer had some interesting points. http://www.worth.com/Editorial/M oney-Meaning/Philanthropy/Opport unities-Exposures-Philanthropy-C haritable-Returns.asp

We are now discussing the possibility of securitizing PRIs with several brokerage houses. If philanthropic investors had pools of L3Cs to trade, they could spread their risk, with the added benefit of greatly reducing the cost of due diligence, because it would need to be performed by just one securities underwriter instead of a dozen foundations, each investigating for its own purposes.

It is likely the IRS would accept this due diligence as prima facie evidence that the buyer is in compliance with all the rules governing PRIs. The more sophisticated these instruments become, the easier they will be to use and justify.

So this gets to my question on how the State law satisfies federal law. As an ex Wall Street guy I doubt there will be much of a market for securitization as the fees the issuer will want will take up much or all of the profits the L3C will generate. But groups like Good Cap or Calvert may do it further their general purpose. I can also see some very interesting possibilities for Kiva and the ebay version of kiva.

And it seems that there is a bit of a leap of faith about the IRS as apposed to a sophisticated legal argument. My gut, having read nothing more than the links I have posted, is that there may have to be some test cases and possibly requests for private letter rulings from the IRS, so it may take a while before foundations except the L3C as a PRI shortcut.

As per the idea of having a captive or related foundation to pass on individual donations, my gut is that the IRS would take the conservative road and call that a related party transaction which would thus prohibit the related foundation from passing tax exempt donations.

It looks like the registration process will be really easy, and I cant see any reason why at TEN we would not form and L3C and then move our existing business into it, but Ill be running that by a lawyer before I make such a move.

John Berger The Emancipation Network http://www.madebysurvivors.com/

John wrote:

I have not read a copy of the legislation yet, but based on press reports I think entities like mine (The Emancipation Network) would want to seriously consider registering as an L3C in Vermont.

As a Vermonter, I am ambivalent about this line of reasoning. First, the state needs businesses that add value to the state economy, and as such the legislation is intended to boost the prospects for community development through, say, home grown agricultural enterprises that provide a social return on investment (for example, farms and the preservation of landscape as heritage in my book) or, as one state rep puts it, "downtown redevelopment, low-income housing, energy initiatives and work force development."

So my question would be, "What does Vermont get for registering companies like Emancipation Network"? I don't mean this to be crude or unsympathetic to the good work of EN. Rather, to point out the intent of the legislation.

I am sure that with the new law will come regulatory concerns, and perhaps some kind of oversight agency will be needed to make sure that companies aren't moving to the state for legal shelter, without an interest in the state's economic growth agenda.

Alternatively, there could be the view that either way, its good for Vermont. I'm not convinced of that, yet. Rather, I feel folks who like the L3C concept work to enact similar laws in their state, using the resources of Americans for Community Development and Vermont's legal precedent as a launching pad.

What do you think?

This sounds promising, but as you said a lot more clarity is needed. As test cases and new models roll out it will prove out various ways to (and not to) use it.

Lars, its very common for corporations or partnerships to register in the state that they think offers them the most benefits and there is competition between the states to get these registrations. This does not mean the state expects the corporations to actually move there, although that is part of the reason. For example, Delaware is very popular because of the shareholder and investor protection they offer that other states don't.

Hi John, I understand it may be common elsewhere, for example in the financial sector. I am not certain it is in Vermont's interest to become the Delaware of L3Cs. Again, I think its important to consider both the context and intent of the legislation. Corporations have been excellent, traditionally, at exploiting loop holes. Our secretary of state doesn't currently have a proposal for regulating these corporations, which will be important to ensuring the intent of the law is seen through.

I agree about the lack of regulation or even better constraints in the the law. As it exists now I am concerned that it is just wishful thinking that foundations or the IRS will trust the structure.

Well, as far as I can see it, the only option is for you and Sarah to actually move here, thus netting the state the business too ;)

According the Council on Foundations, L3C isn't likely to happen at the IRS without Congressional legislation.

The thing that bugs me about that link Lars, is that there is this assumption that PRIs are hard for a foundation to do and that the IRS requires extensive paperwork, etc. Thats just not true, the IRS standards are clear and all extra work is just being created by Foundation bureaucracy. So I have to agree that absent federal law changes, or some leadership from the foundation community, the L3C in and of itself is probably more of a discussion starter than a solution.

However, the L3C would I think make it easier to explain to our customers what a hybrid model is.

If students of others wanted to make local collections for specific families in need, is that legal or does it need a licence

The donations are not tax deductible or at least you cant give a receipt saying they are tax deductible. Im my state you need to register to solicit donations for a tax deductible entity, but I dont know if you have to register if you are just helping someone out.

I think local banks often have shells that are set up to support this kind of thing, but this is on only a guess as in my area anytime someone does those "john has cancer and needs $" drives they seem to do it through a local bank. No idea if that is deductible though.

If it were run by a church it could be.

I am confused by schools and colleges. And I am not talking about the tax angle as much as what you have to certify as an entity if you are colecting for a cause.

obviously most american schools do fundraisers for themselves; this web seems to suggests that schools can do fundraisers for microcredit banks http://ymci.org/en/about

Just because a school does a fundraiser does not mean thats a tax exempt donation. Some private schools are non profits and some public schools have partner non profits (like PTAs) that can solicit tax exempt donations. But I think most schools just take donations as non-exempt.

yes john but I am still trying to ascertain something simpler than the tax issue- ie what places etc empower collection for a cause; so if I am eg suggesting to first year college students they could start fundraising for social businesses development in their local community, are there legal issues to look at?

There are legal issues but simple ones. They have to be doing what they are saying they do. They cant say something is tax deductible if its not, and in many, perhaps all States, to solicit funds for tax deductible entities they have to register with the state. I do not know if you have to register to solicit funds for non tax deductible purposes.

Hello, please call me Jennie and I have recently started the Incorporation of Getsmartmoodle L3C in Vermont. I am very hopeful about this new business model and its Potential. Obtaining a Foreign corporation and have the services of a Registered Agent as I reside in Virginia. Will keep you posted on progress as it is made and created with this new L3C ... already learning and thats the best teacher is experience ... have a great day.

Jennie

John Berger said:

Very interesting articles linked below about a new legal structure in Vermont called the L3C which essentially formalizes the hybrid model social enterprise as a legal entity under state law.

There are some very important claims being made including:

Passing L3C legislation streamlines a time-consuming and often expensive process to get specific Internal Revenue Service approval for a company to accept foundation funds, through a program known as "program related investment,"

I have not read a copy of the legislation yet, but based on press reports I think entities like mine (The Emancipation Network) would want to seriously consider registering as an L3C in Vermont.

However, the part I dont get is how state law in this case trumps federal law. The PRI rules and rules about what donations can or cant be tax deductible are determined by federal law - so does anyone have an idea on how this state law makes the federal law work better for hybrids? Is this only for PRIs from foundations or could it stretch to individuals? Even if it cant stretch to individuals, could not a hybrid not be an L3C and co managed private foundation that passed individual donations through to the L3C?

Lots of possibilities here but a lot more clarity is needed.

http://www.burlingtonfreepress.c om/apps/pbcs.dll/article?AID=/20 080420/BUSINESS/804200301/10

http://philanthropy.com/news/gov ernment/index.php?id=4459

http://www.communitywealth.com/N ewsletter/August%202007/L3C.html

http://www.leg.state.vt.us/docs/ legdoc.cfm?URL=/docs/2008/bills/ passed/h-775.htm

John Berger The Emancipation Network http://www.madebysurvivors.com/

Hi Jennie it's great to see you here. I hope you'll find ways to contribute and that the people here at <Ned> contribute to your endeavors. Lots of us are interested in education and your GetSmartMoodle is really smart. That link is to your original site here is your L3C site.

I wonder if you might say a bit about the difference? LOL some of the explaining might have to wait until developments in October. That's fine, I just wanted to link to your sites and welcome you here.

Thanks everyone for this conversation.

I have a farm, with education as a central role, and possibly even more of our income than produce. We are considering incorporating (presently a sole-proprietorship), and am wondering what the benefits of an L3C could be for us?

Thanks in advance for any thoughts.

Hello Keith, I don't have any expertise but thought to put up a link to The Non-Profit Law Blog --that link is to a more recent article on the topic, if you scroll down to near the bottom of that post there are several related links, including a helpful primer.

My understanding is that this structure is particularly useful for facilitating investments from foundations and so if there are relationships of this sort you are exploring then the LC3 structure may well suit your needs.

Off the subject of legal structures, but on the topic of what you do, I was impressed with a recent post by Sharon Astyk Who Will Grow Your Food? Part I: The Coming Demographic Crisis in Agriculture:

How many more people do we need? Well, for rough calculation purpose Aaron and I have argued that since most low-industrialization societies (not pre-industrial, but with access to dramatically fewer energy resources) both in the present and the past have about 1/3 of their population involved in agriculture either as full time farmers or as part time farmers. This was a rough calculation and not intended to be precise, but for the purposes of rhetoric, Aaron and I have called for 100 million new farmers. Most of those, we suspect, will not be full time farmers, but small gardeners and market farmers. We will also, however, need millions of full time farmers as well.

Do we ever need what you're doing Keith!

I've been a participant on NED since it was formed and originally connected with many NED members via the Omidyar.net forum.

I have led a traditional non profit based in Chicago called Cabrini Connections, Tutor/Mentor Connection (CC/T/MC).

The CC part is a site-based tutor/mentor program connecting inner city kids with adult volunteers.

The T/MC was created in 1993 at the same time as the founders were starting the CC side. It's goal was to build a master database of all tutor/mentor programs serving Chicago and a marketing/advertising strategy that would draw needed resources to each program on a more consistent basis.

In other words, if you were operating a single program and trying to find dollars, volunteers, ideas, etc. there would be an organization in the city acting to help you get those resources, but not charging you a fee for their services. The T/MC model intended to draw funds from third-party organizations who wanted to see more kids born or living in poverty move through school into productive adult lives.

In the past 18 years we've built a large range of resources to support the T/MC but we have always struggled with this duo organizational structure. We were depending on the Board and volunteers of a single program to share money and time to fill a leadership void intended to help all organizations doing similar work.

This spring the Board of CC has voted to separate the two parts of the organization and I'm going to continue leading the Tutor/Mentor Connection.

I'm providing this information because I have the opportunity to structure the new organization in ways that expand the ways we generate revenue. I have been looking at the LC3 model, but don't know much about it.

Thus, I'd like to re-energize this conversation and invite you all to journey with me over the next few months as I figure out a new organizational structure to put on top/bottom of a thriving 18 year old entity.

Can you give me any update on the status of legislation in various states supporting LC3 corporate structures?

Can an LC3 organization solicit donations from individuals and foundations as well as investment from others?

Does an LC3 org require a minimum Board of Directors structure?

If any of you have been going through this process I would appreciate your own thinking on this.

An L3C event near you , Dan.

Dan, I know LC3 and B Corps have been finding favor recently with the NPO and social enterprise communities the past couple years. My understanding is LC3's can get Corp support, but not tax deductible donations from individuals. That's based on recollection, not personal experience, so I would explore more.

Thanks Linda and Mark. Do either of you know of structures that can accept donations and have investors/earn income? Can you point to any example organizations who may be doing this well?

Dan Bassill said:

Thanks Linda and Mark. Do either of you know of structures that can accept donations and have investors/earn income? Can you point to any example organizations who may be doing this well?

Not in America if you want the donations to be exempt. The UK has such a structure.

An exempt non profit can hold an interest in an subsidiary or investment that can accept donations, but it has to be done very carefully and it creates all kinds of tax and reporting problems.

We need congress to change the law to create a new structure, perhaps based on L3C, that allows both. This will never happen as a stand alone bill because the way writing tax legislation works, but if there is ever a tax code rewrite it could create the opportunity to get this done

Is teher a benchmark good practice case of a L3C company