A new and little-known state law is emerging as a potential business model for news organizations seeking alternatives to maximizing profits as a publicly-traded company or avoiding them with non-profit status.
The Low-profit Limited Liability Company, known as an L3C, was signed into law in Vermont last year and similar legislation has passed in Michigan, Wyoming and the Crow Tribe.
L3C supporters have drafted proposed federal legislation that includes newspapers among the industries it targets. The coalition includes Marcus Owens, a Washington attorney who headed the Exempt Organizations Division of the IRS for 10 years before entering private practice in 2000. Owens works for the D.C. law firm of Caplin & Drysdale, which serves as outside tax counsel for the St. Petersburg Times and its owner, The Poynter Institute.
No news organizations are among the several dozen companies that have established themselves as L3Cs in Vermont (search “L3C” here), but the L3C model has bubbled up in discussions about saving newspapers in Chicago, Peoria and Seattle. Owens said he has heard from representatives of newspaper owners and unions as well as community organizations “interested in saving their newspapers.”
As an L3C, a news organization could rely on a wider range of financial backers than is currently possible, as long as the company and its investors share a common commitment to serving an educational or charitable public purpose beyond financial return.
Other states are working on their own L3Cs, but eligibility is not determined by geography. Just as many companies around the country incorporate in Delaware, you can register a Vermont L3C almost as easily from Burlington, Iowa as Burlington, Vt.
The new hybrid model makes it easier for companies to attract investors with different objectives and expectations. It also addresses a fundamental conflict of publicly traded news companies: the obligation to increase shareholder value while spending what it takes to provide communities with the journalism needed to inform civic life.
“The L3C sanctions a low-profit model — it makes it explicit that you don’t have to maximize profit,” said Brian Murphy, a Vermont attorney and one of the state’s leading experts on L3Cs. “You can have a tiering of interests — for-profit investors who need, say, 10 percent return; people looking to support socially-beneficial enterprises willing to settle for 3 percent; and charitable investors willing to take 1 percent.”
In order to qualify as an L3C, a news organization would need to be primarily focused on educational or charitable objectives, with making money only a secondary goal.
“When most people think about charity, they think about something like a soup kitchen,” Owens said in a telephone interview Sunday afternoon. “But it also includes educational purposes.”
He said he believes it’s “doable” for a news organization to meet the educational requirement but said it would require a focus on “publishing stories and reports based on a perceived value to the community and the public, as opposed to their ability to sell newspapers.”
The L3C structure enables foundations to make so-called “program-related investments” to companies with the prospect of recovering some or all of the investment.
Owens and others say such investments by foundations could help companies shore up their footing sufficiently to boost their chances of raising money in the capital markets.
A news company structured as an L3C — as opposed to a non-profit — would avoid some of the limitations of non-profit status, including the prohibition against political endorsements.
Although the L3C lessens the profit pressure faced by publicly-traded companies, it’s no panacea for broken business models.
Unless an investor or a foundation is willing to watch its money simply disappear, as Murphy put it in a telephone conversation Saturday, “There needs to be a model that can be self-sustaining.”
L3Cs could be especially relevant to foundations committed to helping create and maintain journalism. The structure requires an “alignment of mission” between the foundation and the recipient of any investment it might make. And that mission must reflect a clear benefit to the public.
Robert Lang, a business executive and CEO of a family foundation, the Mary Elizabeth and Gordon B. Mannweiler Foundation, developed the L3C idea in 2005 and retained Owens to draft legislation the next year. He said Vermont seemed like a good first home for the concept because of the popularity of both free enterprise and commitment to social good in the state.
Lang organized the nation’s first L3C, L3C Advisors, which produces the Americans for Community Development Web site as a resource for such initiatives. In an e-mail exchange Sunday, he said he is working with the Newspaper Guild and legal experts on “a master plan for recreating a newspaper as an L3C.”
Although companies can use existing state legislation to set themselves up as an L3C, Owens said a federally-approved L3C would streamline the process. He expressed optimism for its chances, arguing that “it’s not a revenue loser” and that it could generate new tax revenue by enabling low-return, but taxable investments by foundations.
