L3C Corporate Form Provides Broad Funding Flexibility for Socially Focused Organizations

By David Rudofsky

The Low-Profit Limited Liability Company, or L3C for short, represents an attractive hybrid business form available to organizations located in Vermont, Michigan, Utah, Wyoming, and Illinois. Specifically, adoption of the L3C form – a hybrid between LLC’s and 501(c.)(3) nonprofit organizations – has the potential to simplify life for nonprofit organizations that may generate some income, even though their primary purpose is charitable or educational, and not income generation. The L3C form may also be of great appeal to for-profit organizations that want to have the leeway to prioritize social gain over profits, without risking shareholder lawsuits.

for-profit sector, L3C, nonprofits, small business, social entrepreneursAlthough L3C creator Robert Lang is working to gain approval for the concept on a nationwide basis, for now the L3C concept is effectively being approved on a state-by-state basis. In addition to the five states mentioned above, North Carolina, Maine and Louisiana signed L3C bills into law in recent months. Further, the New York State Senate passed bill S6726, to allow creation of low-profit limited liability companies in New York State, by a 50-11 vote on June 29th of 2010, with strong bipartisan support. The bill, which had been sponsored by NY State Senator Bill Stachowski, of Buffalo, was put into committee by the NY State Assembly, and not voted on in this legislative session, but is considered likely to gain approval early in the 2011 legislative season.

The key requirements for being an L3C deliberately mirror the IRS requirements governing Program Related Investments (PRI’s). Federal Law requires private foundations to distribute 5% of their assets each year, for charitable purposes, either through grants, or by making “Program Related Investments.” By virtue of their legal structure, and through the use of investment tranches, Low-Profit Limited Liability Companies should be able to tap into vast pools of capital from a wide variety of parties with differing objectives for both social and financial returns, including private foundations, institutional investors, private individuals, and government agencies.

Who are the L3C entrepreneurs? According to a study by interSector partners, as of the spring of 2010, there were 175 businesses registered as L3C’s in the United States with approximately 100 of these in Vermont. These L3C’s spanned a wide range of fields, including farming and agriculture, journalism and publishing, healthcare and education. If one or major foundations came out publicly in support of the L3C movement, these numbers could grow dramatically in the years to come.

 

Great article, but important for organizations to take pause

It's great that alternative structures are being presented for consideration. However, I think it's important to note that there's been a very real debate as to whether the L3C status is even necessary and whether it is in fact a detriment.

As mentioned before, L3C's are governed by state law. And not all states have L3C's that mirror the laws governing PRI's. In fact, most don't. Which is the predominant danger. There are organizations out there that believe that by virtue of being an L3C they are taken care of and don't need to do any further legal analysis.

In lieu of that, the question still stands as to whether it is worth an organizations time (and risk) to become an L3C as opposed to the much more vetted LLC. Certainly don't mean to say that an organization should never use the L3C status. But realize it is relatively new, unvetted and requires serious consideration.

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