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Profits v. Purpose: Hybrid Companies and the Charitable Dollar

35 Pages Posted: 9 May 2012 Last revised: 25 Nov 2014

Rachel Culley

Massachusetts Appeals Court

Jill R. Horwitz

UCLA School of Law; National Bureau of Economic Research (NBER)

Date Written: November 2014

Abstract

Social entrepreneurship -- a catch-all term meaning harnessing business practices for social good -- has attracted people who want to “do well while doing good” for decades. Advocates of the idea have succeeded in blurring the boundaries among legal ownership types and inspired nonprofit/for-profit joint ventures, public-private partnerships, and the widespread privatization of traditional government functions and activities. The most recent manifestation of this trend is the creation of hybrid non-profit/for-profit firms. In the United States, the Low-Profit Limited Liability Company (L3C) is growing, and there are similar firms in the United Kingdom and Canada. In this paper we address the narrow, legal justifications for L3Cs in the U.S., as well as the broader justifications for hybrid organizations. We then identify four types of problems raised by the L3C and, perhaps to a lesser extent, other models: 1) their internal, legal incoherence; 2) the risk to charitable assets and potential for inappropriate use of tax subsidies; 3) the problematic assumption that for-profits are more efficient than nonprofit or government alternatives; and 4) the potentially inappropriate use of government imprimatur. However, recognizing the increasing and unyielding limits on the ability of nonprofits to raise capital, we concede that L3Cs may well offer a valuable route to capital while avoiding conversions to for-profit ownership.

Keywords: social entrepreneurship, hybrid organizations, L3Cs, Low-Profit Limited Liability Company, capital, non-profit

JEL Classification: K22, K34

Suggested Citation

Culley, Rachel and Horwitz, Jill R., Profits v. Purpose: Hybrid Companies and the Charitable Dollar (November 2014). U of Michigan Public Law Research Paper No. 272; U of Michigan Law & Econ Research Paper No. 12-006. Available at SSRN: https://ssrn.com/abstract=2055368 or http://dx.doi.org/10.2139/ssrn.2055368

Rachel Culley

Massachusetts Appeals Court ( email )

MA
United States

Jill R. Horwitz (Contact Author)

UCLA School of Law ( email )

Box 951476
Los Angeles, CA 90095-1476
United States
310-206-1577 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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