Whenever I see something that looks GREAT, I wonder if I am missing something…You know, the old; “Too good to be true”. Over the last many months, I have been doing due diligence on the most appropriate corporate structure for a film project I am working on called “Time To Impact”. The film has a social agenda; use the film to inspire philanthropy, social entrepreneurship, and civic engagement to turn around Paterson, NJ, the third largest city in the state and one of the poorest in the nation in 365 days.
The biggest concern is raising money for the film project. I wondered whether I should set up as a for profit or nonprofit. Going the for profit route didn’t seem to feel good. For one thing, I didn’t want to have a perception that we were doing this just to make money. In addition, I wasn’t comfortable being the guy who says; “Oh, this is going to be the greatest thing since An Inconvenient Truth and Supersize Me. The appeal isn’t in how MUCH people can make, but for the benefit that the film will have from a social standpoint. The pure for profit model just didn’t feel right. On the other hand, setting up a nonprofit involves setting up a 501(c)3, a process that takes many months, requires a board of directors, and other things that just seemed to be a distraction from the main goal at hand. Compound those issues with the fact that we are in a very difficult fund raising environment, we are likely to be grouped with everyone else asking for money, the grant process itself is a labor intensive process, and getting access to for profit money is less likely (if not eliminated), and the nonprofit model also didn’t seem to fit. Months of contemplation on this, and still no decision. Recently, I started taking a closer look at L3C’s.
The more I learned about L3C’s, the more attractive they looked for our film project. Over the last month or so, I have had discussions about my project with some of the top minds in country on the L3C. They seem to agree. This seems to be the perfect fit. So what’s so great?
L3C’s are hybrids of for-profit and nonprofit entities. They are a for-profit company that first and foremost has a social agenda, and making money secondarily. This seemed to address my concern about the issue of perception of my motivation of “doing this just for money”. My understanding is, there are no limits to the profit, as long as the mission is socially oriented. Second, and what I perceive as most beneficial and cutting edge, is the fact that L3C’s automatically qualify as “Program Related Investments” (or PRI’s) for foundations. This is a big deal. Why?
According to Foundation Center, “Program-related investments (PRIs) are investments made by foundations to support charitable activities that involve the potential return of capital within an established time frame. PRIs include financing methods commonly associated with banks or other private investors, such as loans, loan guarantees, linked deposits, and even equity investments in charitable organizations or in commercial ventures for charitable purposes.”
So what does that mean? It means a lot. Foundations are required by the IRS to give away 5% of their assets each year in order to maintain their tax status with the IRS. Traditionally, this 5% takes the form of grants to 501(c)3 charities (the kind we would have been). As a Certified Financial Planner™ Professional, I look at the 5% requirement this way. Starting with 100 percent of the foundation’s investment portfolio, 5% is given away. Those grants hopefully are being given out to worthy causes who will “invest” the money effectively and use it prudently, however it is difficult to determine what the “social return on investment” actually is because in many cases it is difficult to measure the actual social return. I could write another entire column on just that subject alone, but let’s not go there right now. So what is the actual social return on investment of the 5% money? Enter the L3C.
L3C’s are businesses just like any other. Good ones should have a tight business plan and expectation that they are going to earn a profit or else they would not exist. If a business goes to a bank for a loan, the bank wants to know what the likelihood the loan is going to be repaid. That is determined largely on the strength of the business. The BIG deal with the L3C and for the foundation, is that a foundation can invest in the L3C and has the opportunity to actually earn a return on the money. Better yet, the foundation’s investment into a PRI (L3C), COUNTS toward the 5% they must give away each year. Ok let’s stop and recap now.
From a purely capitalistic “non social” viewpoint for a second, the 5% given away represents a 100% loss (looking at it strictly as an investment). Foundations give to good causes which is why they are able to get a tax deduction for the contributions when money is put into them.
If a foundation has an opportunity to earn a return on money and get it back to give again by investing in profitable social business ventures, AND it counts toward money they must give away anyway, why aren’t more foundations doing this?
In an environment of depressed investment portfolios, isn’t this a wise thing do do?
Worst case, the investment doesn’t make money and you lose your investment. Consider it a grant, which is what you are already doing anyway.
Am I missing something here?
If I have piqued your interest, watch the video below. (I’m “The Philanthropic Advisor” in the trailer)
Foundations, let’s make a difference and turn around a city. Please consider helping us fund this film. Email me at firstname.lastname@example.org to inquire.
Join the Movement:
By the way, nothing in this should be considered legal or financial advice and you should not rely on my opinions or the information expressed here in place of doing your own due diligence. Consult your financial professional before making any important financial decisions. This is just my opinion. End CYA.