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L3Cs: For-profit 
financing 
with a soul

By Sally Duros

For nearly two decades, newspapers have faced the challenge of evolving into knowledge-based organizations capable of adapting to the innovations of the Web.

Instead of progressing, however, they’ve been bought and sold by media conglomerates whose mismanagement has buried papers with debt while laying off staff in record numbers. Both profits and the product—the news —have seriously degraded.

Locally-focused stories in newspapers have been shrinking, as has information geared toward the average wage earner. Readers have fled. Advertising revenue has plunged. The Chicago Tribune and the Chicago Sun-Times both have filed for bankruptcy, and it’s possible that soon Chicago could be without a newspaper.

But Chicagoans are not without information. A new ecosystem of blogs and news aggregators has developed on the Web. Many of these sites—like New Communities (www.newcommunities.org), the BeachwoodReporter (www.beachwoodreporter.com) and Newstips (www.newstips.org/interior.php?section=Newstips)—are run by journalists working with passion to tell underreported stories digitally. And legacy newsrooms are creating alliances with online news sites, such as the Chicago Tribune’s ChicagoNow blog network set to launch in June.

Even as new newsrooms emerge and old ones die, it won’t do to build anew upon old models of financing. Instead, the news sector needs a financing model that is flexible and innovative. The model of the L3C, or low-profit limited liability company, will enable agile, sustainable knowledge-based newsrooms.

The L3C merges foundation money, specifically program-related investments, with investor’s cash in a mission-based business that puts purpose before profits.

Under this model, a newsroom will pay a living wage to journalists and executive leadership while earning a return for investors. Most importantly, because it is mission-based, the L3C signals a return to the historical value of newspapers: local news.

How might this develop in the Chicago area?

In May the Illinois House of Representatives unanimously passed a bill (SB 0239) creating L3Cs. Upon signing by the governor, any social entrepreneur will be able to create an L3C in the state. In allowing L3Cs, Illinois joins Vermont, Michigan, Wyoming, Utah, North Dakota, and the Crow Tribe.

Passage of a federal bill, the PRI Promotion Act of 2009 contains a provision that recognizes newspapers as charitable. It also would make the processes of creating and reporting for an L3C as automatic as those for 501(c)3 organizations. That bill has not yet been introduced in Congress.

Among those calling the bill necessary for forming a newspaper L3C is Jennifer Towery, Peoria Newspaper Guild President. She is advocating for L3C ownership of the Peoria Journal Star.

Backers of the L3C model aim to make it an instantly recognizable brand name for social enterprise, just like 501(c)3 is for nonprofits, overseen and administered by the IRS.

The buzz was all about L3Cs at the Social Enterprise Alliance in New Orleans in April, for instance, but still big questions circulated: Why use an L3C when you could do much the same activity with a regular LLC, or limited liability company?

Marcus Owens, a member in Caplin & Drysdale’s Washington, D.C., law office, and former director of the Exempt

Organizations Division of the Internal Revenue Service, explained via e-mail:

An enterprise formed as an L3C… clearly and concisely signals to the foundation community that the enterprise has an overriding socially-beneficial purpose, without a need for examining the organizing document (which would be the case with any LLC or non-profit corporation).

Why is this important?

In the 1960s, the IRS created program-related investments as a tool to enable foundations to invest in a for-profit venture doing social good, now much more common and known as a social enterprise. Such investments were meant to fulfill much the same purpose as a grant, yet could possibly yield a modest return.

However, no process of registration was created for these program-related investments—unlike, for instance, the relatively simple process by which a nonprofit organization can become a 501(c)3 with the IRS.

This murkiness caused hesitation among foundations that were unclear about what qualified as program-related investments. They could ask the IRS for a private letter ruling, which could cost thousands to hundreds of thousands of dollars. Therefore, only five percent of foundations bothered to designate program-related investments.

With creation of the L3C, foundations have a tool that meshes with IRS rules and smooths the way for investments in social enterprise.

Some describe an L3C as a for-profit with a nonprofit soul—a fitting model for newspapers, as they are the only business specifically recognized in the Constitution, and the information they provide is vital to democracy.

Sally Duros has spent the past two decades observing the dance between technology and journalism. Social enterprise is the next big shift. Duros has revived the Real Estate section for the Chicago Sun-Times, facilitated cross-sector partnerships for Chicago Mayor Richard M. Daley and celebrated the chaos of being an independent journalist and communications consultant. She blogs at SallyDuros.com (www.sallyduros.com) and uses Twitter at the name saduros (twitter.com/saduros).

Category: Essay

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