A Social Business Model Alternative: The Hybrid of a Hybrid

One of the themes in the reading was about the funding challenges that social venture models face in the U.S. due to business model limitations. The innovation that my group created would definitely be affected by this gap. We want to form a hybrid business model. Our organization would have a non-profit side and a for-profit side. We plan to use the profits generated on the for-profit side to fund, at least partially, the non-profit side. We will also receive public funding. However, in creating our business how do we put safeguards in place to ensure that the for-profit does not receive improper financial benefit from its affiliation with a tax exempt non-profit? We don’t want to rely on donations and private grants, but we also don’t want to create two separate organizations, as suggested in The Funding Gap, because it would take more time and money. So, my question is have there been proposed alternative models in the United States? If so, what are they?

In searching for hybrid business models that have been proposed in the U.S. that could possibly create a new legal class, I found a hybrid of a hybrid form called L³C. This model is complicated but seems to have a lot of potential and deserves further investigation. Here are the basic tenants of the structure. The L³C is a hybrid form of a for-profit limited liability company (an LLC), but it alters the model in a couple of important ways. First, an L³C must have a social mission as its primary business objective. Also, the term ‘low profit’ is written into the title of the business form so investors notice that the entity is motivated first and foremost by its social goal, but does not exclude making money. Secondly, an L³C must contain specific language that mirrors IRS regulations regarding PRIs so investors can make PRIs to an L³C company. By doing this investors will “accept a lower-than-market rate of return as well as a disproportionately higher risk position, which in turn attracts other for-profit investors by lowering their risk and increasing their potential rate of return. “(http://stlouisfed.org/publications/br/articles/?id=1857).

I am not a business-minded person but I understand that the current legal organizational models in the U.S. are limiting. This is a model that could work for our socially innovative model and potentially many others. Some concerns about this model still need to be addressed, but I believe it is at least a solid starting point and something that we can build from.