Does the new L3C funding model hold any promise for documentary filmmakers?
As newspapers make their fitful shift from print to online, with the revenue problems that go with it, hope has shifted to a new business model that may incidentally benefit people making documentary films.
Low-profit Limited Liability Corporations, or L3Cs, only exist or are about to exist in four states – Vermont, Michigan, Utah and Wyoming. Illinois’s goes into effect Jan. 1. And there is movement in other states on it, and they’ve existed in Britain under the name “community interest corporations.”
In short, L3Cs are a hybrid of LLCs and nonprofits, allowing principals to have partners with a for-profit financial stake, but with the ability to raise charitable donations for which the donor can take a tax opportunity seek out gifts from donors. So, instead of the current model in which some documentary filmmakers are asking for such things as donation-for-film-credit, the LC3 opens the opportunity for significant funding by foundations.
Documentary organizations in the U.S. have most often been either LLCs or 503 (3) (c) tax-exempt nonprofit corporations. A good example of the latter is the Center for Independent Documentary, which raises funds from donors and collaborates with filmmakers on topics such as history or science. In a nonprofit, a board supervises and a paid staff is under its control, something many filmmakers would avoid.
In that way, the L3C is an interesting hybrid.
Jim Witkin, writing for TriplePundit, assessed it this way:
The goal of the L3C form is to bring together a mix of investment money from a variety of sources. This process starts with investments from Foundations known as Program Related Investments (PRIs). Foundations are required to spend at least five percent of their assets in a given fiscal year in order to maintain their tax-exempt status. They have two basic options for spending their money: they can make grants, where there is no financial return on the money, or they can make program-related investments (PRIs) investing in for-profit ventures and potentially earn a return. But to qualify as a PRI, the investment must relate to the Foundation’s mission and the risk/reward ratio must exceed that of a standard market-driven investment (ie, the risk must be higher, and the return lower). Surprisingly, the use of PRIs by Foundations is limited even with the potential to earn a small return. Because of burdensome and costly IRS requirements to verify PRIs, many foundations shy away from investing in for-profit ventures due to the uncertainty of whether they would qualify as PRIs.
The newly-formed Chicago News Cooperative is an example of an L3C in the making. It actually goes to that status Jan. 1, when L3C’s become legal in Illinois. Think of the CNC model as one that would suit organizations doing news-oriented docs.
Not all documentary filmmakers will benefit, especially in the current era of documentary filmmaking. The requirements of LC3s include these provisos:
1. The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s);
2. “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit); and
3. The company must not be organized “to accomplish any political or legislative purposes.”
So, the politically driven docs that have become such a fixture would not work for an L3C. The more typical L3C will be a production company devised to carry out a range of educational efforts, and be willing to acknowledge there won’t be massive profit. But that’s the problem: While most documentary films don’t make back their production costs, there are enough breakthrough documentaries, sometimes only one every few years, that hit the jackpot and allow documentary to dream of bigger things.
There’s confusion about the new model. Writing for Crain’s Detroit, Sherri Begin Welch says that the Michigan efforts to open up the L3C model often takes some understanding.
They are intended to create a low rate of return so that they can attract both foundation and for-profit investors to fund their socially beneficial purpose.
But already there are concerns that early L3Cs forming in a handful of states that have legalized them may not have a truly socially beneficial cause or a business model that will attract both nonprofit and for-profit investors, said Rob Collier, president of the Grand Haven-based Council of Michigan Foundations.
“There’s concern at the state and federal level about the fact that people don’t quite understand what an L3C is,” Collier said.