About six months ago, I got an email asking (a) if I knew anything about low-profit limited liability companies (“L3Cs”) and private foundations, and (b) if I’d be willing to be a guest lecturer in a class, explaining what they were and how they function. I did know something (though at the time not much) about them, so I said I’d do it, then spent several weeks immersing myself in the theory and practice behind L3Cs.[fn1]
It turns out that Loyola’s business school offers an elective class in Social Entrepreneurship. The point of the class, from what I can gather, is to teach business students about how to create profit-making businesses that make the world a better place.
I’ve sensed some skepticism recently, both within and without the bloggernacle, about the propriety of charitable institutions making a profit (or, sometimes, about whether profit-making transforms a charitable institution into a non-charitable one). And I find that skepticism odd. Because of course a charity can (and, I would argue, in most cases should) earn a profit, at least some of the time.
Why? A couple reasons. First, money that’s just sitting around is actually losing value. And that’s the case for everybody (including you and me and for-profit businesses—some companies will use “sweep accounts,” which allow them to invest excesss cash overnight). I assume that charitable institutions don’t have steady revenue, revenue the timing and amount of which match exactly their administrative costs and charitable expenditures. That means that sometimes they’ll have excess cash, which, I hope, they’re earning a profit on that is at least equal to inflation.
Second, I assume that most charitable organizations have cyclical revenue streams. WBEZ, for example, does its explicit fundraising twice a year.[fn2] But then it has to use that money to fund its expenses for the next six months; if it just puts its money in its mattress,[fn3] the donations that people worked hard to earn and give become less valuable.
Moreover, often charities need money in countercylical waves. That is, the local homeless shelter probably faces significant need right now, as people are losing their homes, losing their jobs, and having their wages cut. But now is also probably not the optimal time for homeless shelters to raise money, because people have lost their homes, lost their jobs, and had their wages cut. If, however, the homeless shelter had blitzed the fundraising from 2002-2006 and invested that money,[fn4] it would have an easier time funding its projects in a downturn.[fn5]
Third, sometimes part of what a charity can provide is job training or other experience. As Jonathan points out, that’s one of the purposes behind Deseret Industries. And DI is not alone—Inspiration Kitchens in Chicago (where I still need to eat) teaches restauranting skills to the homeless and the poor, but also has a(n excellent, from what I’ve heard) restaurant that charges what look like roughly market prices.
I don’t mean to suggest that charitable profit-making is always on the side of angels, nor that charities should transform themselves into purely profit-making entities. I do want to suggest, though, that profit is not inimical to charity and, in fact, in at least certain situations, may be an important part of it,[fn6] and that rejecting charitable profitmaking whole cloth is naive, simplistic, and just plain wrong.
[fn1] L3C theory is way beyond the scope of what I want to address in this particular blog post, but here’s the short version: private foundations (think, e.g., the Bill and Melinda Gates Foundation or Mitt Romney’s Tyler Charitable Foundation, or those big family partnerships that seem to sponsor everything on NPR) usually provide grants or loans to organizations so that the organizations can fund their missions. Under certain circumstances, they can make equity investments in a group that works to further the private foundation’s mission. However, generally, an organization that a private foundation can invest in is not the type of organization that provides a market return. The theory behind the L3C is that the the private foundation will make a tranched investment in the L3C. Basically, it will invest in such a way that it takes a lower share of the L3C’s profits and take a higher share of its risks. That way, market investors would get a higher return (because part of their return is what would have gone to the private foundation) and face lower risk (because the private foundation is absorbing part of the risk), and will be more likely to contribute financing, too. Essentially, L3Cs are a way for private foundations to leverage their contributions.
Do they work? It’s fairly controversial, and that gets way, way beyond the scope of this post.
[fn2] It is trying to smooth its revenue by encouraging listeners to joint its High Fidelity program, which allows it to bill your credit card every month. But not all listeners do that, so our listening is still interupted every six months or so with a (shorter and shorter) fundraising drive.
[fn3] Which would be utterly insane.
[fn4] And by “invested,” I should point out that I’m pretty indifferent as to whether we’re talking passive stock-market investment or investing in an active business.
[fn5] Given that we tithe 10% of our income, I assume that donations to the Church have also fallen over the last four years, though I confess I have no idea if the Church’s business interests have done well or not.
[fn6] Though I don’t purport to have provided a comprehensive justification for charitable profitability; these were just a couple ideas that occured to me as I was thinking about this post.