Monsters and Aliens: Attack of the L3C and the ULCA

[from the March 18, 2009 CV Spectator]

As the greed-based economy circles the drain, and as our government struggles to prevent civilization from going with it, we naturally root around for alternatives to the corporations whose leaders brought us to where we are. But two such efforts in Vermont – one already law, a second pending in the Legislature – only manage to dodge the real problem.

Let’s start with fundamentals. There are few greater gifts that the government bestows than a certificate of incorporation, which insulates investors from legal liability for any missteps of the entity they have created. The most they can lose is the amount they’ve invested, even when the corporation kills 8,000 people through a toxic gas release (Union Carbide, Bhopal 1984), triggers rolling blackouts in California (Enron, 2000-2001), or just makes lots of people homeless and/or jobless (big banks, 2008-present).

So, it’s reasonable that we ought to expect something in return when we dole out these certificates. Currently, we expect nothing.

This doesn’t change with the advent of the so-called L3C – a cheeky abbreviation for “low-profit limited liability corporation.” At first glance, it’s a cool idea – get a bunch of investors together who are willing to forego single-minded pursuit of profit and let them incorporate a business that will serve a charitable purpose as defined by section 501(c)(3) of the federal tax code.

As it turns out, though, the L3C is really just designed as a vehicle for big foundations (e.g., the Ford Foundation, the John T. and Catherine C. McArthur Foundation and other names familiar to those who endure those ubiquitous public radio underwriting credits) to make so-called “program-related investments.” After all, why should some foundation donate to National Public Radio the nonprofit when it could simply own National Public Radio the L3C?

The L3C has nevertheless been touted as a potential solution to the journalism crisis in which venerable newspapers are either going bankrupt (e.g., the Chicago Tribune) or just folding altogether (the Rocky Mountain News). If the New York Times were an L3C, the Sulzberger Family could stop trying to please outside investors and just run the paper through a family foundation. It is, I suppose, better than having no newspaper at all.

Meanwhile, the Vermont House has passed and sent to the Senate the Uniform Limited Cooperative Association Act (ULCA). State laws with the word “uniform” in their titles trace their genesis to the National Conference of Commissioners on Uniform State Laws, a quasi-official organization with the often laudable purpose of aligning the statutes of our 50 sovereign states. Middlebury attorney Peter Langrock, a member of the commission, chaired the committee that originally drafted the ULCA. Naturally, he’d like to see his home state adopt the bill.

If the Senate agrees, my advice is to delete only one word from the measure: cooperative.
The ULCA’s purpose is to let co-ops have outside investors as long as the actual members of the co-op remain in control. Proponents contend that co-ops need non-member investors because they have trouble raising capital under their current structure. It is a problem with which I am personally familiar as a board member at both the Hanover Consumer Cooperative Society and the Cooperative Fund of New England.

What makes a co-op a co-op is its democratic character: Each member gets one vote, regardless of how much money she has invested. And, at a consumer co-op, each member gets a share of the surplus based on the amount of goods purchased – again, regardless of how much she invests. An ULCA does away with this core principle, just to attract money, and is thus not properly described as a cooperative.

Everybody talks about socially conscious investing. Those who are serious about it should forget L3Cs and ULCAs and strike a blow for democratizing the economy by forming and joining cooperatives. A co-op is only kind of entity that is completely at liberty to harness the entrepreneurial spirit for the benefit of local citizens rather than faraway shareholders. Like grocery stores, credit unions and electric utilities, national newspapers and other vital but struggling businesses could thrive as democratically run, customer-owned entities. Cooperation is the perfect “thank you” for the gift of limited liability that every corporate entity enjoys.