Thursday, June 8, 2017

Business as Mission:a Possible Funding Structure

Disclaimer: I'm a business guy trying to solve a business problem-and every business or non profit is structured differently. I'm not a lawyer, please don't take any of this as legal advice or execute any plan with out running it be legal where ever you area.I'd welcome a comment from someone who knows more than me.

Problem:  Many Non-Profit entities want to provide funding for Independent For-Profit business start up and expansions, which are providing an income source directly to a non-profit entity in a remote region around the world. This has been a difficult thing for 501(c)3s to do.

501(c) 3s can own for profit companies, as long as all income comes back to the 501(c)3.
But they cannot give money to an independent for-profit business except for services rendered.

Some States have created something called  a  Limited Low-Profit Liability Company, sometimes a  L3C. They may receive non-profit funds to execute the charitable purpose of the Foundation in some cases.

So: In example:

  1. Large Foundation or Other Non-profit is set up with a charter that includes Business as Mission Activities, and creating local bank-business partnerships.
  2. LC3 is set up to offer and administer Grants and/or business as mission low interest loans, partnered with a local bank near the business.
  3. L3C solicits projects  on behalf of one or more Foundations:
  4. A business plan is approved, for a specific project, in two parts: one part grant, and if business goals are met, the other part loan. It would also include interest subsidies to the partner bank and fees to the L3C.
  5. The charitable foundation gets a pre-approval letter from the IRS that the Foundation's principle funds can be used for that purpose, noting that returning principle funds will stay with the L3C.
  6.  The Foundation Funds and administers the Grant porition. andmovest the loan principle to the LC3.
  7. The L3C holds the loan principle, and expected fees in the Foundations account in the L3C.
  8. When criteria for giving the loan are met, The LC3 gives the loan principle, acting as the loan investor, to the local bank. 
  9. The LC3 pays the local bank near the business a pre-arranged difference from their normal interest rate to the lower BAM interest rate. (some local banks can charge high rates of interest)
  10. Loan principle and low BAM interest repayments are made back to the LC3, who puts it, by agreement, into the account LC3 set up for the Foundation. This principle may be loaned out again to another project as directed by the Foundation,
  11. As the Foundation's account in the L3C grows, it can use the funds to fund other projects but will not receive it back, and thery by maintains its charitable status.
Complicated, but one done, can get easier each time it is repeated.