L3C

Definition

From the Wikipedia:

"A low-profit limited liability company (L3C) is a legal form of business entity in the United States that was created to bridge the gap between non-profit and for-profit investing by providing a structure that facilitates investments in socially beneficial, for-profit ventures while simplifying compliance with Internal Revenue Service rules for "Program Related Investments"." (http://en.wikipedia.org/wiki/L3C)

Discussion

Robert Lang:

"The creators of the L3C have been very careful to work with every state that has passed the L3C law to either write the law for them or vette their bill to insure conformity. Part of the importance of the L3C is as a brand. It is useable in all 50 states even if that state has not passed an L3C bill since it is a variant form of LLC and LLCs are legal in all 50 states. For example a Utah L3C could be used in NY and a Michigan L3C in California.

The L3C is a for profit model that should be used with an income strategy that will generate sufficient income to support the entity since it not a nonprofit and is not designed to look to donations for ongoing support. The best L3Cs are designed in such a way as to integrate income and mission. The basic structure of the L3C makes it an ideal recipient of program related investment (PRI) by foundations since by law it has to put mission above income.

There has been much buzz about the L3C requiring IRS recognition or approval. This is not true. It is totally legal to use an L3C as the recipient of PRIs right now without anyone's approval. The only caveat is that the foundations making the PRI still must comply with IRS requirements for expenditure responsibility and conformity with mission, etc. In other words the law does not eliminate due diligence.

The determination of how to organize and under what state, etc. often requires the help of consultants and/or an attorney. There are always tax and legal issues to consider and they will vary depending on the project and location. All LLCs including L3Cs depend on a document called an operating agreement to determine how the organization will function. An LLC is often called a partnership with corporate protection and like a partnership the members of the L3C (They are called members not shareholders) essentially set their own conditions of doing business and the relationships among themselves. They are very flexible organizations which can elect pass through status for tax purpose making them an excellent way for a wide variety of NGOs, government agencies, for profit organizations and for profit investors to work together under one structure. The for profit structure also eliminates many of the restrictions that cripple nonprofit operations."

More Information

Please visit www.americansforcommunitydevelopment.org for information about L3Cs and for language that has been used to formalize them in states where they are legally recognized as business entities. That website is sponsored by L3C Advisors L3C which was organized by Robert Lang, the creator of the L3C, and early supporters to assist those seeking to organize an L3C or get help advancing the passage of the L3C law in their states.