NEW BREAK-THROUGH FOR START-UP LOANS AND EQUITY INVESTMENTS

A new form of company and a change in IRS regulations will likely open up funding for business start-ups and grow-ups. The type of legal entity is called a “L3C” which is a limited liability company or LLC. They are also called, “social benefit entrepreneurial enterprises” (SBEE). Thus far, Vermont and Michigan have adopted laws which permit the formation of the L3C and similar legislation is pending in several other states as bi-partisan measures. The key is that the L3C is formed for the purpose of social benefits – defined by 501.c.3 laws. Profit cannot be the main purpose, but the law does not prohibit profit distribution to the members of the LLC (which for tax purposes is usually treated as a business partnership).

The key result of achieving this status is that 501.c.3's are permitted to invest or loan funds to the L3Cs. The catch is that a prudent donor will want a “private letter” issued by the IRS which recognizes the LLC as a L3C entity. These letters are expensive and time consuming to get. However, there is legislation pending in Congress which changes the method of qualifying. A special unit of IRS will be set-up to deal with these types of qualifications (not the IRS attorneys). Generally a form, correctly filled in, will be submitted to the new unit which will basically rubber stamp its approval, putting the L3C in the proper slot to receive funds from 501.c.3s.

Private foundations are required to disburse five percent of their capital each year. Now those funds are simply given away. The new approach does give the foundations the ability to recoup the principal and earn some return on the principal. This change should generate considerable funding of SBEEs.

To find our more about SBEE L3Cs, please visit Wikipedia.org, at: http://en.wikipedia.org/wiki/Social_entrepreneurship, or Google “social benefit entrepreneurial enterprise”. See Social Velocity at: http://www.socialvelocity.net/2009/02/changing-nonprofit-finance-the-other-side-of-the-story/ A great talk on the subject by Mark Lane, a tax attorney, entitled, [Introducing L3C - Part 1] L3Cs: Social Enterprise's Powerful, New Capital Formation Tool, starts on Youtube at: http://www.youtube.com/watch?v=AZ9uQmVvtjA . Don't miss the question and answer parts.

Maryland has joined the states which now have approved L3C social benefit entrepreneurial enterprises: Maryland First State in Union to Pass Benefit Corporation Legislation, http://www.csrwire.com/press/press_release/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation .

A certifying/branding organization has been formed to provide due dilegence and rating of L3C: Become a B Corporation,http://www.bcorporation.net/become

There are several financial institutions which have adopted the B corporation ethics: http://www.bcorporation.net/community/financial

Jim Miller
jimmiller5417@yahoo.com