Home Legal and Regulatory Issues Why Structure a College or University as an L3C?
Why Structure a College or University as an L3C?

Why Structure a College or University as an L3C?

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By Robert Lang, CEO, Americans for Community Development

The President and CEO of the Association of Private Sector Colleges and Universities, Steve Gunderson, has been a longtime colleague and friend. While he will admit to having advocated for the L3C concept during his previous leadership role at the Council On Foundations, he has also shared with me that his current purpose is not to promote one corporate structure over another. Rather, as he so often says, his job is to promote postsecondary education with a career focus! But he recently shared some insight with me that is appropriate to this article.

He wrote, “We should be lauded by those in government. But the current administration believes that everything must be run by and through the government, so they have engaged in an ideological war on our sector. Do we have some bad schools? Probably. But so does every other sector of higher education! And the current rules make clear that when those schools act improperly they already have the tools they need to deal with it – although the rest of the story on the Corinthian Colleges will come out at some time as an unprecedented attack by the government, the likes of what we would see in Russia rather than America!

“I am a little disappointed when I read articles from others in the nonprofit sector commenting on our financial model. The reason most of our schools’ revenues come from federal sources is because we serve the poorest of the poor students! Do you know that 80 percent of the students in our schools come from families with total family income of $80,000 or less! And almost 60 percent come from families with $40,000 or less total family income! Over 90 percent of our students are eligible for federal financial aid. We should be commended for serving them, but this administration chooses to ignore that reality.”

There is little doubt that in the current environment almost anything that makes a profit is looked down upon and yet the earnings of free enterprise businesses are the engines that drives the entire economy of the country. If you are an ice cream company all you care about is that people like and buy your ice cream so you can ignore the flak, but in social sectors such as education the public and governmental perception counts. Some nonprofit and public colleges and universities are attacked for one reason or another but the sector as a whole is revered. The for-profit sector, as Steve notes, seems to be abused as a sector due to the fact that it is for-profit.

Americans for Community Development think the L3C (Low-profit Limited Liability Company) is a way to combine the mission focus of the nonprofit sector with the operating metrics of the for-profit thereby silencing those who say a for-profit puts money before mission.

Americans for Community Development has looked at many for-profit and nonprofit spaces where there is a revenue stream and a basic desire of the entities to use that revenue stream to perform valuable social missions. When we look at the education space we see a need to blend the college or university with the needs of the students and community. L3C entities put mission before profit, and organizing colleges and universities as L3Cs will bring the best available socially minded capital without compromising the core purpose of student learning, avoiding the temptation to engage in unethical practices, and keep costs low to avoid burdening families with debt. Underrepresented and low-income populations deserve a good education and can become active contributors to society and the economy. An L3C model is a wise approach to broaden education while making economic sense

What you ask is an L3C? I dubbed the L3C, “the for-profit with the nonprofit soul,” since it is a for-profit business doing the work of a nonprofit. It operates in the space between the nonprofit and the pure for-profit organization to perform a social mission. A type of LLC, the L3C is able to bring together a mix of foundations, trusts, DAFs (Donor Advised Funds), endowments, pension plans, individuals, corporations, nonprofits, governmental entities and others in order to achieve social objectives while operating according to for-profit metrics. Just like any LLC, an L3C has the liability protection of a corporation and the flexibility of a partnership. The major difference between an L3C and a standard LLC is that the L3C puts mission ahead of profit. But most of the people I have met in the for-profit education sector would not think of doing otherwise so why not build it into the charter.

I created the L3C or Low-profit Limited Liability Company in the mid 2000s, and it was codified in its first state in 2008 when Vermont became the first state to make the L3C part of their Limited Liability Company body of law. The term “Low-profit” was used since the furtherance of a charitable mission usually requires the entity to sacrifice some portion of the profit. The key elements of the law are:
“Sec. [applicable state code] is added to read:

[Applicable section] “L3C” or “low–profit limited liability company” means a person organized under this chapter that is organized for a business purpose that satisfies and is at all times operated to satisfy each of the following requirements:

(A) The company:

    • (i) significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, 26 U.S.C. §170(c)(2)(B); and
    • (ii) would not have been formed but for the company‘s relationship to the accomplishment of charitable or educational purposes.

(B) No significant purpose of the company is the production of income or the appreciation of property; provided, however, that the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.

(C) No purpose of the company is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the Internal Revenue Code of 1986, 26 U.S.C. §170(c)(2)(D).”

These elements are part of the definition of what the foundation sector calls PRIs or Program Related Investments. We will come back to this later but this link with the nonprofit sector is very important to the owners and managers of an L3C. And unlike a nonprofit which normally has to constantly raise money to cover its losses, the L3C, if properly capitalized, while not earning a large profit, it will earn more than it spends and the managers can expend 100 percent of their effort on running the business and 0 percent of their time on raising funds. In addition, there is nothing in the law or the IRS code that prohibits the L3C from gaining assets and intangible value and becoming a valuable property to its owners. Likewise while it may not normally make bundles of money, (most for-profit colleges and universities do not make a lot and are not hot prospects for large IPOs any way,) there is nothing which regulates the amount of profit only that the primary purpose for organization and operation should not be profit.

The L3C was created because there was no form of for-profit business organization specifically designed for the carrying out of business intended to provide charitable benefit and to mesh exactly with the IRS definition of PRIs.

This was done because in order to meet its goals the L3C normally needs low cost capital and the investment of PRIs from foundations is one way to get this capital. Well over a thousand L3Cs have been created and are still operating since Vermont passed the first law in 2008. It is now the law in many states and Indian Nations but most importantly like a Delaware corporation the L3C can be organized in one state and used in any state.

The L3C, because of its legal structure, requires the managers to place furthering the charitable mission ahead of earning a profit. However, unlike a nonprofit, it leaves the managers free to make purely business decisions, which encourage efficient management and use of capital. The L3C has owners who can earn a return on their share after the mission requirements have been fulfilled. Assets can also be bought and sold as management determines advisable at a loss or gain. L3Cs can be bought, sold and merged. In other words, they are a business but one whose reason for being is furtherance of a charitable purpose.

From a management perspective, since the L3C is a variant form of LLC, the organizers can retain ownership control and never worry about an out of control board that takes them out of the picture. Like any LLC, its organizational structure is built around a governing document called an operating agreement and all the owners (called members in an LLC) write the operating agreement as they see fit.

Choosing an L3C creates the additional benefit of branding. Whenever the members of an L3C tell someone they are an L3C they are saying exactly what they are – a charitable organization that is a business. Potential employees will know they are joining an organization that is designed to pay its employees market rate for their job, one which can freely pay bonuses, and otherwise incentivize their employees, but expects them to put the needs of the charitable mission first. The founders of an L3C also have a much wider range of capital formation opportunities than they would as a nonprofit.

For detailed information on the L3C visit the Americans for Community Development website: americansforcommunitydevelopment.org

If you own, manage, or work at a for-profit, private sector school you are now asking what is this low profit stuff? The name is not a reflection on requirement but the normal status for most social enterprise. It is hard to do well and generate excessive profits and most of the dedicated owners and managers of private sector colleges and universities I have talked to agree. They want to do good first but they want to remain in control and get a fair return for their investment. They like being a free enterprise rather than a regulated nonprofit and do not intend to go public anyway. (Those who do wish to go public might be better off with the Benefit Corporation model.)

Americans for Community Development think the L3C will become an important vehicle for transitioning new business models for colleges and universities be they currently for-profit or nonprofit. Many universities are trapped seeking to provide economic development, community assistance, technology transfer, incubator development for new companies, and new job banks for the community and recent graduates. Bureaucracy, mission focus and funding constraints make the educational mission a challenge in these areas of service.

An L3C school could expand beyond just being a school. One or more purposes set forth in Section 170(c)(2)(B) of the Internal Revenue Code, is the furtherance of a charitable mission and education is an example of a charitable mission articulated in the IRS code. The L3C should use its revenue to further that mission but it may earn that revenue in a multitude of ways and it may pay salaries and operate the business otherwise like any other for-profit business. By that structural choice, it could attract foundation, DAFs (Donor Advised Funds), PRIs, private capital and corporate resources.

This is where that linking to certain aspects of the nonprofit sector can pay off for the L3C institution. The PRI (and as the rules stand now, in most cases described herein DAFs take the same actions) does not have to be a grant to a nonprofit.

Under the code a private foundation can make an investment in a for-profit entity if that entity intends to use the funds to further a charitable purpose.

The IRS states: “To be program-related, the investments must significantly further the foundation’s exempt activities. They must be investments that would not have been made except for their relationship to the exempt purposes. The investments include those made in functionally related activities that are carried on within a larger combination of similar activities related to the exempt purposes.” (http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Program-Related-Investments.) And it counts against the foundation’s requirement to distribute approximately 5 percent of their assets annually as grants or PRIs.

This means that a private foundation could give money to an L3C school as long as the money is used to further a charitable purpose, which aligns with the foundation’s mission, such as paying for the costs of a research program. Education is a defined charitable purpose under the law. I do not expect private foundations to come running to give money to L3Cs tomorrow but the college or university whether it public, nonprofit or for-profit has a unique asset – alumni. Up to this point a for-profit college or university has not been able to monetize the value of their alumni like nonprofit and public schools have, but through the use of DAFs that opportunity exists. An alumnus could form a DAF and instruct the sponsor of the DAF to give the money to the L3C school for a particular charitable purpose. When they donate to the DAF they receive the same tax deduction that a donor to a nonprofit gets.

Michael Zimmer, executive-in-residence at Ohio University wrote a paper for us entitled, “L3Cs in the University – The Time Has Come.” In it he wrote:

“The L3C offers a new vehicle for advancement of social enterprise missions that are ill-suited for a public or nonprofit university environment. For example, a consulting firm has been discussed for graduate employment as part of a business school program. An energy technology transfer unit might be used to promote commercialization of university R&D outside of the current technology transfer and research office paradigm and providing better opportunities for rewarding faculty. An L3C university might consider a special job-training institute blending its resources with the local labor unions and employers. All of these initiatives would be established into a social enterprise vehicle like an L3C to capture the ‘profit with a conscience’ behind the idea. Students benefit from new jobs prospects, and academic barriers are removed to better performance. New sources of capital attraction can arise. Better public-private partnering occurs. Faculty is empowered outside the classroom.”
Review paper at americansforcommunitydevelopment.org

The L3C college or university can become an “Opportunity Ecosystem.” Instead of heavy burdens of student loans the tuition might be reduced as far as zero tuition and no costs for students, and the fruits of their labors will help fund operations that produce the funds needed to give them an education.

At one time it was the job of the college or university, however organized, to provide the student with an education and it was the job of the student to take what they learned and use it as a chip in the search for a job. Since most for-profit schools were more career oriented they tried to tailor the education carefully to provide the student with the needed training to get a job but still finding them a job was not the prime responsibility of the institution. That has changed. Now it seems we are in an era of credentialing and the school is to blame if the graduate does not quickly get employment at a certain level commensurate with that credentialing. That is a problem particularly for the for-profit sector since, as Steve Gunderson points out in his opening quote, they accept a much higher portion of the challenged members of our society.

Is there an answer? One solution may be for the career oriented educational institution to create an incubator operation to nurture students into self-employment. This is another place where the PRI/DAF investor can play a role. A subsidiary can be formed to partner with graduates to nurture them into business. And current students can earn part of their tuition by participating. For example, most of the accounting and bookkeeping functions could be “outsourced” to the accounting students under the direction of a professor. A foundation or DAF(s) might be part of the subsidiary.

The L3C offers a new vehicle for advancement of missions that are ill suited for a pure university environment. At ACD we have discussed the formation of a consulting firm for graduate employment as part of a business school. An energy technology transfer unit is under discussion to promote commercialization of university research and development outside the current technology transfer and research paradigm. A university could consider a special job-training institute blending resources with labor unions and employers. All of these initiatives would be established as part of the L3C school or a subsidiary L3C to capture the “profit with a conscience behind the idea.” This revolutionary strategy to business makes the priority more than just the bottom line, but provides social and moral accountability.

Within the last 20 years companies that approached business with less of an emphasis on profits and more emphasis on their social mission have flourished and been widely accepted by an eager public, ready for change and modern, conscience corporations to match that change.

Public and nonprofit colleges and universities also face a lot of problems in the 21st century. In the same paper mentioned above Mike Zimmer also said:

“Change is necessary. Why, because the current university model is choking, not nurturing professional development while deteriorating into a pedigree problem, with an arms race wrapped around sports development, cost escalation and capital attraction with little academic purpose. These academic preferences are rooted in vanity and identity, not stewardship, execution and results. A change is even more warranted as tuition rates skyrocket and job prospects dwindle – as we have failed to properly invest in ourselves and the true academic mission. Most academics dwell on how effective education costs are in terms of time and money. The more critical question is this; how much is the education worth to the student, and to their professional development – the critical value propositions to the stakeholder. Clearly, fresh ideas, better communications and broader skills are necessary for students to effectively adapt to the changes brought by technology, globalization, economic duress and market transformation. More attention has been spent the last decade on BCS and conference alignments than academic transformation of business models in our universities.

“That model can change built on the L3C, entrepreneurial and applied learning strategies centered in transformation sponsored by social enterprise. This not a new branding initiative that mirrors corporate America. Why? Because the academic community cannot nurture and thrive in the middle of a society that is failing – as to mission, goals and leadership. The void of political, corporate leadership must be filled with a new brand of transformative academic leadership. Heterogeneous faculty, innovative actions and thinking and new business models reflect a message that the university is dynamic and receptive to change, not a mere protector of the status quo. Applied learning, teamed in the marketplace, using innovative practices, and methodologies with integration by stakeholders will make the difference in the future for the successful college and university.

“This social enterprise approach will shift the status and academic profile and the ‘associative goods’ in the education process (the personal attributes, characteristics of other customers who are purchasing the same product or services) to a more sustainable set of performance norms. The L3C can foster that result through applied learning centered in writing, communication, personality and character development in which the student is grounded in analysis and reasoning. That foundation in the L3C academic unit will foster better competencies such as teamwork, communication, sophisticated decision-making, emotional intelligence, leadership, and decision-making (grounded in empirical data and analytics). As big data doubles in volume every two years that focus on analytics and reasoning will be essential to synthesize that data into valuable products and services under any degree program.”

ACD believes as academia undergoes transformation and the search for new business models, it needs reassessment based on market reality not by the faculty, but the ultimate stakeholders, who are the students served.

Innovations and new techniques through L3Cs will need open evaluation with fresh eyes to promote that change and new service orientation.

Absent these changes, there will be a dubious market for colleges and universities grounded in the business models of the past centered solely in pedigrees with escalating costs – through popular social content run in multiple media sources, based on aptitude tests, brands and BCS and NCAA tournament results. Nothing special will evolve nor more occur for the college or university than the current society of excesses grounded in declining value and quality – with an ever escalating consumer price.

The L3C is particularly suited as a tool for owners of small and family run colleges who are “dedicated to the educational mission” and want to ensure that future owners carry on their standard after the sale of their companies. And, in case anyone missed the thread, again let me point out that the opportunities for bringing in dollars from corporations, donors, foundations and even the government are embodied in the L3C without the need for the owners to give up control.



Robert Lang

Robert M. Lang is the creator of the L3C and Founder of Americans for Community Development. As the creator of the L3C, he is responsible for getting the L3C bill passed in nine states and three Indian Nations and is working with Congress to pass a federal bill, the Philanthropic Facilitation Act that will facilitate the funding of L3Cs and other social enterprises particularly those seeking a PRI.

He created the first L3C in the world, L3C Advisors L3C, to work with social entre¬pre-neurs, the phil¬an¬thropic com¬mu¬nity and the world’s largest financial institutions to cre-ate L3Cs and the new, unique finan¬cial prod¬ucts needed for social impact investing. He is working with others internationally in a project to develop social finance structural harmonization around the world and facilitate investment in L3C type structures worldwide. He has worked with the original creator of the DreamFutures (Social Impact Bonds) concept since the beginning and played a key role in their early use.

Bob has a degree in Economics from Miami University, Oxford, Ohio and completed graduate level courses in Economics and English. He is on the Advisory Board of Mission Center L3C, a founder of MLW DreamFutures Institute L3C, a Strategic Advisor to Total Impact Advisors and an advisor to Congress and others on the implementation and use of DreamFutures and Social Impact Bonds. He is CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation, an advocate and supporter of using for profit vehicles to achieve charitable missions. He created and leads the ACD Taskforce on Education & The Workforce dedicated to using ACD structures for education and job training. He is involved with other charitable organizations. He advises a significant number of L3Cs. He was a cosmetic chemist and consultant in the cosmetic field, and when he was owner and CEO of Fabrique Cosmetique, Inc. designed and developed cosmetic systems and machinery. He was a member of the Independent Cosmetic Manufacturers and Distributors Association, and is a member of the American Chemical Society, and the National Association of Watch & Clock Collectors. He lectures frequently, participates in seminars and on panels worldwide. He is frequently consulted on issues related to saving newspapers in the U.S., written many white papers and been published in trade publications, popular magazines, on the Web and newspapers.


Contact Information:Robert M. Lang // Founder & CEO – Americans for Community Development LLC // CEO – Mary Elizabeth & Gordon B. Mannweiler Foundation Inc. // Founder & CEO – L3C Advisors L3C // Founder & CEO – Endless Sky L3C // 914-248-8443 // robert.lang@americansforcommunitydevelopment.org // rlang@fabriquecosmetique.com // robert.lang@l3cadvisors.org // robert.lang@endlessskyl3c.org // americansforcommunitydevelopment.org/

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