In recent years, socially-minded entrepreneurs have begun testing a new type of business entity: the L3C, or Low Profit Limited Liability Corporation. A low-profit limited liability company, or an L3C, is a legal structure (a variation on a limited liability company or LLC) that is relatively new to the United States. The United Kingdom began using a similar structure in 2005, called a Community Interest Company. In 2008 in the U.S., Vermont became the first state to establish the L3C as a legal structure. Since that time, it hasn’t been without its proponents and detractors.
Essentially, an L3C is a hybrid of a for-profit and a nonprofit venture, and attempts to toe the line between the two. By doing so, new funding sources are opened up for organizations that, while technically being for-profit, have a primarily charitable focus. Examples of current L3Cs include: a motorcycle safety school, farmer’s markets, and a research organization to make pediatric Xrays and CT Scans safer for kids.
In this article, you’ll learn:
- Where you can legally form an L3C
- The pros and cons of starting an L3C
- What a PRI is, and how it relates to an L3C
- The future of the L3C
So, where can you start an L3C?
In 2008, Vermont became the first state to adopt this legal structure, and the first L3C was founded by attorney Robert Lang, one of the leading advocates of the L3C. His organization, Americans for Community Development, provides detailed information about L3Cs, and you can find out more about the organization on their website.
Currently, you can form an L3C in Illinois, Kansas, Louisiana, Maine, Michigan, North Dakota, Rhode Island, Utah, Vermont, and Wyoming, and in the federal jurisdictions of the Crow Indian Nation of Montana, and the Oglala Sioux Tribe.
Pros of The L3C Structure
For her input on the pros and cons of an L3C, we consulted expert Deborah Sweeney, CEO of Mycorporation.com, a company that specializes in business document filing services.
“The L3C provides all the benefits of an LLC structure, including flexibility in ownership, management, decision making power, and profit distributions. The ‘social’ nature of an L3C also provides branding and marketing opportunities—customers and employees love to be associated with organizations that are not solely focused on profit, but also have a social purpose as well,” Sweeney said.
Another positive aspect of the L3C structure is that the filing process is pretty simple, very similar to forming an LLC.
Proponents of the L3C, such as vocal supporter Robert Lang, point out that the L3C is a way for companies that need to make a profit to stay afloat to keep their social missions at the forefront. From this perspective, an L3C is a winning proposition—investors make a return, look good in the process, and, if they’re a private foundation, retain tax exemption. The L3Cs themselves in this scenario have found a harmonious balance between making a profit and making a difference.
What is a PRI?
PRI is an acronym for Program Related Investment. This is the kind of investment that a foundation can legally make in a for-profit organization with a few stipulations. Namely, that the investment is made to accomplish a charitable goal (not to earn money for the foundation) and that it isn’t made to work a political agenda. Some foundations make large contributions to social enterprises in this manner—for example, the Gates Foundation has a $100 million PRI fund.
Proponents of the L3C structure say that an investment in an L3C is a PRI, and that this open doors for social enterprise.
What’s The Catch?
The opponents of the low-profit limited liability company primarily say the concern is about the tax exempt status of foundations that invest in these companies. Foundations have a legal obligation to distribute at least five percent of their assets each year, Sweeney notes. The idea is that the L3C structure paves the way for some of this money to be invested in L3Cs. The foundation’s investment would be a PRI with mutual benefits, wherein the foundation is able to make a return.
The conflict stems from the fact that the IRS has not confirmed that an L3C can be an official recipient of foundation dollars. The IRS determines the tax exempt status of foundations, so this uncertainty puts any foundation in potential jeopardy if the IRS declares at some point down the line that L3Cs are illegitimate investments. If that happens, it’s possible foundations who have invested in L3Cs could lose their tax exemption status, and that is a risk many are simply not willing to take.
Sweeney points out that in April 2012, the American Bar Association Business Law Section released a letter opposing legislation for L3Cs for this reason. “There is no operating history for this entity, so the legal and tax repercussions are undetermined,” Sweeney said.
The L3C: Coming to a state near you?
In an interesting turn of events that demonstrates the controversy around this topic, the state of North Carolina passed legislation to allow L3Cs, only to have that repealed in January of 2014, with officials saying the availability of the L3C entity is not necessary.
Despite growing pains, in addition to the 10 states listed at the top of this post, 26 other states currently have legislation pending to allow for the creation of the L3C. If you’d like to drill down into specifics, there is a regularly updated tally of the total number of L3Cs in the US by state.
Is this a business structure that you’d like to see become legal in your state? Share your thoughts in the comments below!