Hybrid business model seen as boost to newspaper industry

A new business form combining social mission with capitalism may hold hope for newspapers endangered by falling circulation and ad revenue. -db

Citizen Media Law Project
Commentary
September 29, 2010
By Marina Petrova

With subscription and advertising revenue dropping, the newspaper industry is in dire need of a new and – more importantly – sustainable business model.

The Low-Profit Limited Liability Company (L3C), a novel hybrid business form combining a social mission with a for-profit entity, has been named by many as the solution to journalism’s money problem.

Back in February, Sally Duros argued that the L3C can save newspapers. Likewise, Free Press discussed the L3C on SaveTheNews.org. Then, in July, Andy Bromage reported that the Pulitzer Prize-winning newsweekly Point Reyes Light had already found salvation in the L3C.

As a result of this publicity, CMLP has been receiving a lot of inquiries from online media creators who would like to form an L3C. The business form is now extensively covered in our legal guide, including a detailed explanation of its tiered capital structure, state by state sections on how to form an L3C, and an overview of its advantages and disadvantages.

In short, there is no magic to the L3C. State law requires that L3Cs operate primarily to further a social mission and keep profit-making a secondary concern. The L3C is designed to accomplish this goal by using a tiered capital structure, heavily reliant on the investments of private foundations. Since private foundations would likely not expect market-rate returns, the L3C could potentially allow a journalism venture to focus on providing high-quality news reports and analysis.

Here is the caveat: obtaining investments from private foundations is not easy. Thus far, the IRS has not declared it will automatically approve all private foundation investments in L3Cs. If the IRS determines that a foundation’s investment in an L3C risks the foundation’s resources in an imprudent way, the foundation will be subject to significant excise taxes. To avoid such penalties, foundation managers may seek a written opinion from legal counsel that clearly explains why the investment actually furthers the foundation’s charitable mission. Unfortunately, a lawyer’s written opinion could be costly to acquire and would only protect the foundation until the IRS makes an official determination on the investment. A private foundation may also request that the IRS pre-approve its investment though a private letter ruling. Yet, such requests may take up to eighteen months to process and cost thousands of dollars in filing and legal fees without any guarantee of positive results. Given these challenges, private foundations are reluctant to invest in for-profit ventures like L3Cs.

Without private foundation investments, an L3C will likely have to put forth considerable efforts to finance its operations. Under such circumstances, profit-making may become a primary concern, like it is in the newspaper industry today.

Marina Petrova is a second year student at UCLA School of Law and a former CMLP legal intern.

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