Date of Award
Master of Public Administration (MPA)
Dr. Andrew Ewoh
A new business entity designed for social entrepreneurs to embrace is gaining acceptance in a number of states, including Louisiana and North Carolina. The new entity, the low-profit limited liability company (L3C), is a byproduct of the current two options of operating, as a traditional private company or a nonprofit organization, not being an ideal fit for the entities being established by social entrepreneurs.
Trying to take advantage of both options’ advantages, and reduce the limitations, L3Cs were created to afford the assurances found in the private sector while still delivering funding often found in the nonprofit sector. A common source of funding in the nonprofit sector comes from private foundations, which can issue grants or programrelated investments. The legislation allowing for the creation of L3Cs in both Louisiana and North Carolina are written in a demeanor that encourages private foundations to distribute funds to L3Cs via program-related investments.
The legislation does this by using the same language found in the Internal Revenue Service (IRS) code that qualifies a private foundation’s choice to issue a program-related investment. The qualifying stipulations the IRS enforces require the investment’s primary purpose to advance the foundation’s charitable objectives and should not be used for the production of income as a significant purpose, and the funds cannot be used directly or indirectly to lobby or for political purposes. The legislation by the two states being discussed takes these three IRS stipulations and uses them to qualify an entity as an L3C. The legislation in both states require an L3C to significantly further the accomplishment of one or more charitable purposes while the production of income and appreciation of property cannot be a significant purpose of the L3C. Additionally, an L3C cannot seek to accomplish any political or legislative lobbying purposes.
To examine this policy issue in more detail, an exploratory case study was used to provide the basis for determining if L3Cs are, in fact, doing what they are established to do, which is to serve a social cause while not placing a significant purpose on making a profit. Understanding this fact will enable the researcher to ascertain whether or not this social-business model should be supported in other states.
The purpose of this study is to explore how two L3Cs in Louisiana and two L3Cs in North Carolina have embraced the new L3C entity and benefited from program-related investments made by private foundations. While there is evidence to support the fact that some of these L3Cs have benefited from funding from private foundations, it was not clear that the three stipulations qualifying a L3C’s existence were being upheld. Due to the fact that these entities are housed in the private sector, they are not required by the states to produce financial records or annual reports ensuring they are funding a charitable purpose without placing a significant purpose on making a profit. Due to this minimal oversight and the vague language used to qualify an L3C and program-related investments, the L3C model is not recommended for use in other states unless the issues of oversight and vague language can be corrected.