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There has been a lot of inquires on our blog about L3Cs, so we have decided to provide a more complete description (from Wikipedia) to clear up any possible misconceptions of the L3C. This is of course under the understanding that we are not engaged in giving any professional, legal, accounting, or investing advice. If professional advice is needed, please seek out the proper professional.

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”.
 

Background

The L3C is a low-profit limited liability company (LLC), that functions via a business modality that is a hybrid legal structure combining the financial advantages of the limited liability company, an LLC, with the social advantages of a non-profit entity. An L3C runs like a regular business and is profitable. However, unlike a for-profit business, the primary focus of the L3C is not to make money, but to achieve socially beneficial aims, with profit making as a secondary goal. The L3C thus occupies a niche between the for-profit and charitable sectors.

As of September, 2009, an L3C can only be formed in the states of Michigan ,Vermont, Wyoming, Utah, the Crow Indian Nation and the Oglala Sioux Tribe. On August 4, 2009, Gov. Pat Quinn signed Illinois’ L3C Bill SBO239 and the law will take effect on January 1, 2010.

Robert M. Lang, the creator of the L3C, CEO of The Mary Elizabeth & Gordon B. Mannweiler Foundation Inc. and CEO of L3C Advisors, L3C the nations very first L3C recommends that you visit the web page for Americans for Community Development for frequent developments on the L3C.

Legal Structure

The L3C is a form of limited liability company (LLC) and possesses many characteristics of a typical LLC. Like a traditional LLC, the L3C is a for-profit entity. Like a traditional LLC, the L3C offers a flexible ownership structure, wherein each member’s management responsibility and financial stake may vary according to individual needs. Like a traditional LLC, the L3C’s members enjoy limited liability for the actions and debts of the company. And, like a traditional LLC, the L3C is classified as a “pass-through entity” for federal tax purposes. (more…)

The hot topic in foundation circles today is the L3C, otherwise know as the low profit limited Liability Corporation. Experts tout it as the latest development in social enterprise. Several states are now legalizing L3Cs and the tax and philanthropic benefits that accompany them. You may have read the recent news concerning the Bill and Melinda Gates Foundation and its focus on “creative capitalism.” There has been increased emphasis on social enterprise organizations, and its supporters are currently pitching their use for federal approval.

L3Cs are part of a movement to expand the scope of charity, including foundation grants and individual donations beyond the 501(c) (3) public charity model. L3Cs open up private foundation money to the social enterprise sector; but only a very special kind of pivate foundation money known as PRIs (or Program Related Investments). PRI investments can come to a L3C in the form of a loan or equity an investment.

Now, you might ask; what does the word investment have to do with non-profits organizations like you involved in Social Enterprise? Think of it as high engagement grant making activity. In the same way a venture capital company invests in a for-profit enterprise inorder to generate a return on investment. A foundation looks at its PRI investment money to further the “effectiveness” of its charitable dollars beyond making just an outright grant, which is the traditional means by which that you and I are most familiar with. One of the unique aspects of PRI money is that it comes back to the foundation grows and then is later “reinvested” for other PRI activities. Furthermore, the amount of PRI investment counts toward the manditory 5% that foundations are required to give out in order to maintain its legal status as a private foundation.

Fundamentally, an L3C is a limited liability company (“LLC”), which is a type of for-profit legal entity that has existed throughout the World for over 1,000 years. LLCs are widely accepted and used, and are treated as partnerships for income tax purposes. Since, L3Cs are recognized as partnerships for income tax purposes, they file IRS Form 1065. (more…)