l3c

7.    Explore tax structures to enable new organizational forms.
In the early twentieth century, Congress created a variety of 501(c) tax categories, enabling the existence of nonprofit organizations exempt from some federal income taxes. The creation of this new organizational form, and the establishment of tax deductions to encourage donations to such organizations, set the stage for the development of a vibrant nonprofit sector, whose workforce now makes up 10.5 percent of U.S. jobs.

Today, as social entrepreneurs demonstrate successful solutions regardless of organizational form, they increasingly blur the lines between the nonprofit and for-profit sectors. New tax structures, leading to possible new organizational forms, could help to encourage social innovation, while lending confidence that could spur greater philanthropic, private, and public investment in the development of sustainable models.

One example is the for-profit organization Outside The Classroom, which seeks to reduce alcohol and drug abuse on college campuses through an innovative Web-based curriculum for college students. While the company has recently begun generating a profit, its start-up phase proved particularly challenging. The organization was started as a nonprofit, but found itself turned down by dozens of grant makers. It then decided to become a for-profit organization and find “patient capital” from socially motivated investors who were willing to wait for profits while the market was developed, or accept below-market returns, in exchange for social impact. A new tax structure—or revisiting of 501(c) guidelines—could make it easier to adopt the core characteristics of social entrepreneurship and support companies like Outside The Classroom, which fit somewhere between traditional nonprofits and traditional businesses.


Model:  North Carolina’s Low-Profit, Limited Liability Company (L3C)
In the 2007 session, North Carolina State Senator Jim Jacumin introduced the “Endangered Manufacturing and Jobs Act,” in an attempt to support North Carolina’s furniture industry, which has suffered in recent years as a result of global competition. A key element of the bill is the creation of a new organizational identity, the Low-Profit Limited Liability Partnership Company (L3C).  L3Cs could generate modest profit, while pursuing charitable or educational aims. The new tax structure would make it much easier for foundations to make use of a little-used but already established vehicle—called Program-Related Investments (PRIs)—to invest in for-profit initiatives aimed at addressing social problems. In the case of North Carolina’s furniture industry, the existence of an L3C structure would greatly simplify the process of accepting philanthropic funds to aid in the purchase and revitalization of the state’s ailing furniture factories.

Robert M. Lang, Jr., chief executive of the Mary Elizabeth & Gordon B. Mannweiler Foundation, which developed the idea for the L3C structure, says that the idea is taking off in other states as well: “Vermont’s House of Representatives has passed a bill that would create the new designation, pending approval by the state senate. Backers are also trying to get legislation passed in Georgia, Michigan, Montana, and North Carolina.” (UPDATE: this legislation has passed in Vermont. Click here to learn more.)

In partnership with government, social entrepreneurs can augment their ability to generate and implement transformative, cost-effective solutions to the most challenging societal problems facing our nation and the world. According to Vanessa Kirsch, president of New Profit Inc. and co-chair of America Forward, “Every day, social entrepreneurs are developing and implementing innovative solutions to meet our country's domestic challenges, and they are achieving greater results with fewer resources. Just as public investment has supported major initiatives in the past, a future president—and other city, state, and federal administrations—can support social entrepreneurs and their effective solutions and, in doing so, effect measurable change in our nation.”

In addition to Louisiana’s Office of Social Entrepreneurship, a number of initiatives focused on collaboration between government and social entrepreneurs have appeared in recent years. In Virginia, the Phoenix Project has partnered with high-level government officials to encourage social-entrepreneurial solutions that will reduce poverty in the state. In Texas, the OneStar Foundation, a quasi-public agency that leads the Corporation for National and Community Service activities in the state, is working in partnership with Texas Governor Rick Perry. OneStar has established a social sector development fund—with funding from the state matched by private funds—that seeks to stimulate social innovation, entrepreneurship, and investment in Texas’ nonprofit sector. Vermont recently passed legislation for a Low-Profit, Limited Liability Partnership Company (L3C), to accommodate social enterprises that blur the lines between the nonprofit and private sectors. The U.S. Department of Agriculture partnered with the Girl Scouts of the USA to train a new generation of leaders in rural communities in social entrepreneurship through the Challenge and Change program. One of the presidential candidates has called for a national Social Entrepreneur Agency. The Center for American Progress has provided thought leadership and recommendations for a White House Office of Social Innovation. New Profit’s America Forward coalition of more than 60 social-entrepreneurial organizations is working to connect social entrepreneurs with policymakers. The Ash Institute for Democratic Governance and Innovation at Harvard University’s John F. Kennedy School of Government will convene a working group of government officials, social entrepreneurs, and other thought leaders to examine and seek to change the way America’s communities approach social problem solving. Root Cause’s Public Innovators is working with government leaders at the city, state, and federal levels to promote a new way of thinking about and approaching social problems. These new initiatives constitute the first wave of what is likely to be a flood of new experiments in governmental support of social entrepreneurship.

RECOMMENDATIONS FOR GOVERNMENT TO ADVANCE SOCIAL ENTREPRENEURSHIP
Government has frequently developed institutions, programs, and policies to support a variety of activities in the private and nonprofit sectors. The 13 recommendations detailed here are coupled with models that draw on existing government support of social entrepreneurship; government support of private-sector small business entrepreneurship; and non-governmental initiatives that could serve as models for government.

To aid policy makers and government agencies in navigating these recommendations, we have divided them into three categories from which to take action from:

•    Lay the foundation for a new era of social entrepreneurship.
•    Set policy to enable and encourage social entrepreneurship.
•    Develop financial and non-financial resources for social entrepreneurship.


Next week: 13 Recommendations & Models