Why the L3C is not taking off in the arts
This article is a response to a panel discussion entitled “L3C and the Arts: Understanding the Potential of Low-Profit Limited Liability Companies (L3Cs) in Arts and Culture” produced by Michael DiFonzo, moderated by Andrew Taylor and presented at the Columbia University School of the Arts Theatre Program.
Much discussion (both for and against) has surrounded the new L3C business entity. First legislated by Vermont in 2008 and currently authorized in nine states and two American Indian tribes, the L3C, short for Low-Profit Limited Liability Company, is essentially a privately owned, for-profit LLC with a charitable or educational purpose, or mission, and aims to take advantage of both for-profit and non-profit sources of funds, particularly Program Related Investments (PRIs) from foundations.
If you have never heard of a PRI, you are not alone.
While there are many foundations in the United States, only a few hundred offer PRIs. By law foundations are required to give away 5% of their endowment annually, commonly via grants, but increasingly as PRIs. In contrast to grants, however, PRIs may be offered to for-profit companies. These investments follow three main rules by the IRS, which outline that PRIs must extend the foundation’s mission, must not have profit as its primary aim and must not engage in politics.
In other words, foundations may engage in speculative investments in high-risk areas that would otherwise be avoided by investors. The foundation advances the public good by investing in a charitable cause without the expectation of a return, though it is not illegal if the company profits or the foundation makes a return. Examples of what can be funded by a PRI, such as pharmaceutical research, green initiatives or low-income lending, are laid out by the IRS’ proposed rule of April 19, 2012.
Indeed the L3C was formulated to take advantage specifically of PRIs. Other advantages include the rise of impact investors, diversifying ROIs through tranche investing, expanding funding sources or potential strategies to avoid unrelated business income tax (UBIT).
Intrigued? But can they apply to the arts, you say?
The L3C has many supporters, none louder than Michael DiFonzo, who created not only the panel discussion at Columbia, but also l3candthearts.com. In his own words, “Our industry is interested [in L3Cs] but no one has the education and the knowledge of how to do it or even begin to think about the concepts being discussed today….And I’m going to tell you there are very few [L3Cs]. I’m asking you guys to become the forerunners to try and do it.”
Currently there are over 700 L3Cs in existence, but no clear case studies have emerged. The panel highlighted Maine’s Own Organic Milk, whose aim is to promote agricultural development and distributing local milk. Some colorful examples listed by interSector include Masonic Bingo and Relationships Can Suck, though neither have websites.
What is clear is that L3Cs do not appear to be taking off in the arts.
L3C advocates, such as Mr. DiFonzo, lawyer Marc Lane who has set up many L3Cs, or consultant Rick Zwetsch who runs interSector Partners L3C, will most likely face the eager seller, stony buyer effect in the arts sector. While resistance to innovation is to be expected, in this case I do not see it as a bad thing.
Right now the L3C advocates need early-adopters, both on the entrepreneurial and investment side. In other words, they are doing one of the hardest things, selling a new product in a new market. With recently debated topics, such as Six Things the Arts and Republicans Have in Common, I am skeptical our sector as a whole has what it takes. That does not mean some people should not try or that we do not need to address these woes.
I believe traditional arts organization will be slow to adopt, just as we see them deal with technology or new media. With real funding and human resource shortages ever present, creating an L3C would require time and know-how that are fundamentally lacking, as Mr. DiFonzo already noted. PRIs will also need to become more common and foundations will need to know that they indeed offer them.
Ultimately a tool is only as good as the idea you have. The arts need more innovations than conductors talking to their audiences and a business entity does not in itself create new ideas. Hybrid models are exciting and should bubble up organically. I have hope for us Millenials, and I have seen many innovative organizations in Europe.
In Italy an exciting hybrid non-profit/LLC called Articolture, which offers services in exhibition design, A/V production, music and film, is making waves. In England, the Firestation Center for the Arts is a hybrid model and director Dan Eastmond is shaking things up by challenging our aversion to profit. In Germany ufaFabrik is a multidisciplinary center offering the arts, cinema, a café, a mill, an elementary school and much more. And they do it despite the challenge of little private philanthropy and increasingly less government support. Let alone an L3C!
For the visual arts, I suspect that artists working in participatory art, or socially engaged practices, may make good use of the L3C. Jon Rubin’s Conflict Kitchen, which sells food from countries with which the United States is in conflict, would be a good candidate. For the performing arts, theaters may branch off successful plays into L3Cs.
For now it appears the L3C is slow to take off in the arts. More ideas, awareness and education are needed. Furthermore, if the arts have not already engaged in widespread entrepreneurial activity with LLCs, why would an LLC+Mission Statement be much different?
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