Not-for-profit companies that carry out a social mission experienced a bad case of whiplash during the great recession. At a time of growing demand for their services, financial support from government declined. It was a particularly discouraging time for new socially minded entrepreneurs hoping to make an in impact on their communities.
The fact is the District is facing a $330 million shortfall, and government support for nonprofits is down and will likely continue to fall for the next several years. Significant budget deficits facing the city will force organizations to look elsewhere for support. Socially minded entrepreneurs are unlikely to succeed without a greater range of business options to sustain their work. That is why I am proposing a new business model called a low-profit limited liability (L3C) company for the District.
Establishing a traditional nonprofit company is a time-consuming, bureaucratic nightmare. Regulations require any income created by the nonprofit to be mission related. It makes no sense for a museum to be harassed by the IRS because money made in the museum cafe and poured back into the general operating budget is not directly related to the organization’s core mission.
The L3C Legislation I introduced last month would remove these regulatory restraints and allow firms to harness the energy of the market.
Under this new business classification, a firm interested in engaging in a benevolent mission could seek funding from the same sources for-profit firms rely on, such as banks, pension funds and individual investors. At the same time, L3Cs would not lose access to support from foundations and governments. Foundations would still play an important role as an investor that is not seeking a return and thus allowing higher payouts for private-sector investors. The companies would be allowed to make a profit, plow that money back into their core mission and give some return to investors — albeit a more modest one than would be expected from a firm solely focused on the bottom line.
Providing new access to capital for community-minded companies is critical. Without an infusion of private sector funds, we are unlikely to make substantial progress toward addressing serious challenges like illiteracy, unemployment and poverty. There simply is not enough charitable giving or government money to effect change — even during good times.
Giving new benevolent organizations the option to make a profit means that foundations, trusts, endowment funds, pension funds, corporations, other for-profits and government entities can be brought together to achieve social objectives. Investors in the enterprise are just that: people or organizations that take a risk in anticipation of a return. This hybrid business model blending nonprofit and for-profit principles has had some success across the country. So far, some 350 L3Cs have been created in eight states. Organic milk producers in Maine, for example, have used the L3C designation to create a company that allowed 10 dairy farms to stay in business.
Here at home, the model is best exemplified by DC Central Kitchen, a nonprofit that turns leftover food into meals for at-risk individuals while offering culinary job training to once homeless adults. Central Kitchen is fueled in part by revenues generated by a for-profit catering company named Fresh Start catering.
The Low Profit Limited Company Establishment Act will energize socially minded entrepreneurs by providing innovative ways to get the job done. These motivated individuals should not be bound by the old nonprofit structure. The District should be the next jurisdiction to harness the market for the greater social good.
Sekou Biddle (D) is an interim at-large member of the D.C. Council.