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Turning Nonprofits into For-Profits

Turning Nonprofits into For-Profits

Bikestation's board determined the best way to meet demand for its transit centers was to raise money from private investors—which meant turning the nonprofit into a for-profit social venture. Allan Crawford

By John Tozzi | BusinessWeek

November 19, 2009

New hybrid corporate structures allow nonprofits to accept private investment without diluting their missions

The nonprofit Bikestation reached a crossroads in late 2007. Founded in Long Beach, Calif., in 1996 to design, build, and manage bike transit centers, the 10-employee organization couldn’t handle all the calls coming in on its $300,000 budget, funded mostly through earned income. With little grant funding available, the board determined that the best way to meet demand was to raise money from private investors —which meant turning Bikestation into a for-profit social venture. “We just didn’t have the resources to expand the mission and the vision further,” says Andréa White-Kjoss, who joined the nonprofit as CEO in 2004.

Social enterprises like Bikestation often don’t fit neatly into existing ownership structures. Those that register as nonprofits have trouble tapping private capital to expand, while for-profit companies risk compromising their missions because they must put shareholders’ returns first. But growing interest in hybrid business models has spurred recent efforts at the state level to create new corporate structures that allow entrepreneurs to integrate nonfinancial goals into for-profit businesses. “The intentions of entrepreneurs and investors have evolved over time to include a desire to create social value as well as shareholder value,” says Jay Coen Gilbert, co-founder of B-Lab, a Berwyn (Pa.) nonprofit that certifies mission-driven companies. “Corporate law has not evolved to serve these new needs.”

One new form, known as the Low-profit Limited Liability Company (or L3C), is intended for companies that put their missions before profits. The structure lets them qualify for “program-related investments” from foundations—loans or investments that further a foundation’s goals and also may yield financial returns. First adopted in Vermont in April 2008, the L3C is now also on the books in Michigan, Utah, and Wyoming. There are 53 L3Cs in Vermont and a handful in other states so far.

In California a separate effort is under way to take “a holistic approach to the real friction points of trying to meld a social mission and a true capitalistic model of a corporation,” says R. Todd Johnson, a partner at Jones Day in Palo Alto. Johnson, along with attorneys Susan Mac Cormac and Derrick Britt, is leading a working group to draft language for the new form and present it to California lawmakers later this year. The rules would address tensions like how to report social impact to shareholders and what happens if the company is acquired or goes public.

CORPORATE CONSTITUENCY STATUTES

For now, however, social ventures must find creative ways to straddle the line between nonprofit and for-profit. At Bikestation, the board decided to form a new for-profit company called Mobis Transportation Alternatives. They incorporated Mobis in mid-2008 and raised $500,000 from angel investors, including the Tech Coast Angels, late last year. Staff members switched to work for the new business, and Mobis licensed the intellectual property from the nonprofit, including the Bikestation name and other proprietary information for creating transit centers. The nonprofit remains essentially a holding company for the intellectual property, though Bikestation plans to use the licensing revenue to make grants. As part of the agreement, the nonprofit got a small ownership stake in the new Bikestation and controls a seat on the board.