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By Brittany Harden | MiBiz

WEST MICHIGAN — A new corporate entity that blurs the lines between for-profit companies and nonprofit organizations could make it easier for foundations to invest in revitalizing Michigan’s economy.

The new low-profit limited liability company (L3C) designation was created to help companies with a social cause attract capital from both for-profit and nonprofit sources.

The L3C designation, which has only been approved in a handful of states, also makes it easier for foundations to invest in companies that engage in socially beneficial activities by simplifying compliance with IRS rules for Program Related Investments, the loans or investments private foundations can offer to, for example, affordable-housing or community-health projects, even if they are run by for-profit companies.

Although more prominent in Colorado and Illinois, L3Cs are starting to pop up in Michigan, thanks to the passage in January 2009 of legislation allowing for the new classification. A search of the Michigan Dept. of Commerce website found 126 companies registered as L3Cs, with socially conscious names such as Dedicated to Make a Change L3C and Disruptive Innovations for Social Change L3C. About two dozen are based in West Michigan.

One of the components of the L3C that makes it attractive is its tiered capital structure, which allows the company to allocate risk and returns differently to different types of members. That would allow PRIs by private foundations, for example, to be allocated the highest risk and lowest rates of return. In exchange for the risk-reward, foundations could maintain decision-making powers in the L3C to ensure the company’s work qualifies as a PRI.

Private investors who are socially conscious could also accept below-market returns, while private commercial investors such as banks could be allocated high returns and low risk.

The financing flexibility and ability to retain control are part of the reason why Gregory Truex opted for the L3C entity form when he founded his company, Michigan PACE Energy Program L3C, which helps educate municipalities about the state’s new Property Assessed Clean Energy program. The Muskegon-based company operates out of the Grand Valley State University Michigan Alternative and Renewable Energy Center.

“It’s a differentiator for us,” Truex said. “The L3C raises eyebrows. People want to know how it works. It’s a point of conversation, and it designates us as an educational organization. Our only mission is education, but that’s not to say that we won’t form a different organization in the future and facilitate some (project financing).”

Truex, a former banker, said Michigan PACE’s revenue comes from its work with municipalities in developing PACE programs, which ultimately help implement clean energy projects. The company’s packages of engagement range from working with a local government to raise awareness about PACE to a five-day consulting program.

Truex explained that the L3C structure allows him equity and control over project-related investments. He said he can more accurately describe the control structure that goes along with it since he has the power to manage that asset for its life.

Socially conscious entrepreneurs who are willing to take the long view are often a good fit for the L3C format, says an attorney who has helped guide several startups with the L3C designation.

Marc Lane, an environmental attorney in Chicago at the Law Offices of Marc J. Lane, explained that he helps companies use funds designed for a specific project and creates the low-profit corporation, which is aimed at supporting a social venture.

“Together, the foundation and the L3C’s private-sector funders can help ensure its long-term sustainability,” said Lane. “As important, the foundation’s support may actually reduce the social enterprise’s entrepreneurial risk: The talent, expertise and experience of a foundation’s management will often elevate the foundation’s role to that of a social venture capitalist which has a stake in both the viability of the venture and the social impact it delivers.”

Lane said he sees a promising outlook for L3Cs becoming a more prominent business entity form.

“L3Cs are helpful in the facilitation of program-related investment, which can be leveraged to help out the private sector. I see them as driving job creation and economic development, and Michigan is in desperate need of both,” Lane said.

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• l3c
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• west michigan