Abstract

http://ssrn.com/abstract=1944141
 
 

Citations (1)



 
 

Footnotes (276)



 


 



Purpose with Profit: Governance, Enforcement, Capital-Raising and Capital-Locking in Low-Profit Limited Liability Companies


J. Haskell Murray


Belmont University - College of Business Administration; Belmont University - Massey School of Business

Edward I. Hwang


Government of the United States of America - Presidential Management Fellows Program

September 30, 2011

University of Miami Law Review, Vol. 66, No. 1, 2011

Abstract:     
Described as a “for-profit with a nonprofit soul,” the low-profit limited liability company (“L3C”) is a relatively recent hybrid business entity form, designed to occupy the space between for-profit and nonprofit companies. The L3C is designed to prioritize charitable, educational and certain social purposes like a nonprofit while allowing investors to share in the company’s income and equity like a for-profit entity. L3Cs burst onto the corporate law scene in 2008 when Vermont legislators amended state LLC statutes, authorizing the formation of L3Cs, as a type of LLC, in that state. As of August 29, 2011, eight additional states and the federal jurisdictions of The Crow Indian Nation of Montana and The Oglala Sioux Tribe have passed similar L3C statutes. By the end of August 2011, 440 L3Cs were registered.

L3Cs have proved polarizing. Supporters of L3Cs tout the form as a solution for social entrepreneurs to pursue an overtly social mission and to access capital more easily from both nonprofit and for-profit sources. On the other hand, a number of vocal critics contend that other available legal forms make the L3C redundant and that the L3C is susceptible to abuse. In this article, we take a middle ground approach. We recognize the lack of clarity or flaws in the limited law surrounding L3Cs but believe the issues remediable. After detailing the history of L3Cs and the debates surrounding the form, we identify four main problem areas: (1) governance; (2) enforcement; (3) capital-raising; and (4) what we call “capital-locking.”

In response to these four main problem areas, we offer suggestions to make the L3C more workable for its socially-conscious managers, investors, and the public. First, we recognize that L3C managers are bound by social purpose primacy, but argue they should be given latitude vis-à-vis the business judgment rule to pursue profit-making that may ultimately serve the L3C’s social purpose. Second, from an enforcement perspective, we observe that social investors should have standing to sue to enforce adherence to the entity’s social purpose. Third, in addressing the capital-raising issues surrounding L3Cs, we reject the capital tranching model which suggests that traditional investors will able to obtain market-rate returns on the backs of social investors who may be asked to receive little or no returns. We consider such practices at odds with the social purpose primacy of L3Cs and may provoke a response by the Internal Revenue Service. To fill the gap in the capital structure left by the proposed absence of traditional investors we suggest that L3Cs make use of crowd-funding capital, in addition to funding from foundations, nonprofits, and other socially-conscious investors. Finally, we argue that capital committed by social investors to L3Cs, and profit stemming from that capital, should be locked into the “social stream.”

Number of Pages in PDF File: 52

Keywords: L3C, low-profit limited liability companies, LLC. social enterprise, corporate, two masters, CSR, corporate social responsibility, corporate governance, fiduciary duties, crowd-funding, crowd-sourcing, venture capital, impact investing, investment, foundations, nonprofits, non-profit

JEL Classification: D63, K20, K22, L20, L21, L22, L30, M10

Accepted Paper Series





Download This Paper

Date posted: October 16, 2011 ; Last revised: November 22, 2011

Suggested Citation

Murray, J. Haskell and Hwang, Edward I., Purpose with Profit: Governance, Enforcement, Capital-Raising and Capital-Locking in Low-Profit Limited Liability Companies (September 30, 2011). University of Miami Law Review, Vol. 66, No. 1, 2011. Available at SSRN: http://ssrn.com/abstract=1944141

Contact Information

J. Haskell Murray (Contact Author)
Belmont University - College of Business Administration ( email )
United States
Belmont University - Massey School of Business ( email )
1900 Belmont Blvd.
Nashville, TN 37212-3757
United States
Edward I. Hwang
Government of the United States of America - Presidential Management Fellows Program ( email )
Washington, DC
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,540
Downloads: 468
Download Rank: 34,214
Citations:  1
Footnotes:  276
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.297 seconds