Social entrepreneurs can form a legal business structure in Michigan

Social programs no longer need to organize as a not-for-profit.

The most common type of organization used by the social sector is a not-for-profit corporation. This is still a valid way to organize. You must develop articles, have annual meetings and hire a president, treasurer, secretary and all sorts of reporting to facilitate your organizational structure. Now, however, some of these social programs need to earn revenue to support them. This is where a low-profit Limited Liability Company (L3C) may fit.

Michigan has adopted the L3C statute to allow organizations to use this structure to pursue an express social purpose. To organize as an L3C, you will obtain a separate legal status by filing articles of organization. This is essentially a contract between the state and the corporation where the State of Michigan grants legal status to your organization in exchange for your following the rules created by the state.

As in a not-for-profit entity, the L3C is must be formed to enhance some charitable or educational purpose. However, an L3C may have equity owners who have the right to take distributions of profits and the appreciation of the business equity. This structure may be well-suited for organizations with a social focus, but the organization may generate funds by selling products or by seeking capital from other organizations.

One reason to form an L3C is, in part, because it allows for funding from traditional sources like banks, investors, friends and other types of foundations or organizations. The organization is not tax-exempt, however, and donations or contributions to the L3C are not tax deductible. Forming an L3C is much likely less stressful than organizing as a not-for-profit corporation in Michigan.

You can file for your L3C using the articles of organization on the LARA website. Use form 700 and include the following: Statement of business purpose asserting that the entity significantly furthers the accomplishment of one or more charitable or educational purposes and would not have been formed except to accomplish those purposes; Statement that no significant purpose of the company is the production of income or the appreciation of property; Statement that no purpose of the company is to accomplish political or legislative purposes. Social entrepreneurs may also start to look into forming a B-Corp.

Paul J. Werner is a Michigan State University Extension educator from L’Anse, Michigan. You can obtain free business counseling by registering with the MSU Product CenterWerner has many years of experience in small business ownership and entrepreneurship; he and his wife currently own two small businesses in the Upper Peninsula of Michigan. 

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