What is an L3C?

In recent years, entrepreneurs have been testing a new type of business entity called the L3C, or Low Profit Limited Liability Corporation. A low-profit limited liability company, or an L3C, is a legal structure that is relatively new to the United States. An L3C is a hybrid of a for-profit and nonprofit venture and attempts to tie the line between the two. New funding sources are opened for organizations that, while technically being for-profit, have a charitable focus. A motorcycle safety school and farmer’s markets are some current L3C examples.

An L3C is a for-profit LLC that satisfies three requirements:

1. It significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of the Internal Revenue Code and would have been formed but for the company’s relationship to the accomplishment of those charitable or educational purposes.
2. It does not have as a significant purpose the production of income or the appreciation of property.
3. It does not have as a purpose the accomplishment of one or more political or legislative purposes.

Currently, there are few states that allow you to form an L3C which includes Kansas, Illinois, Maine, Michigan, Louisiana, North Dakota, Rhode Island, Utah, Vermont, and Wyoming.

Benefits for the L3C Structure

The L3C provides the benefits of an LLC structure including flexibility of ownership, management, decision making power, and profit distributions. An L3C also provides marketing and branding opportunities – customers and employees love to be associated with organizations that are not solely focused on profit but have a social purpose as well.

Another benefit of the L3C structure is that the filing process is easy and very similar as forming an LLC. Proponents of the L3C 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.

What is a PRI?

PRI stands for Program Related Investment. This is the kind of investment that a foundation can make in a for-profit organization. Namely, the investment is made to accomplish a charitable goal and that is not made to work a political agenda. Proponents of the L3C structure say that an investment in an L3C is a PRI. Few PRIS are made mainly because it is hard to determine which investments qualify and the IRS levies significant fines on foundations violating rules.

The Drawbacks of L3C

The concern with an L3C 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. The idea 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 IRS has not confirmed yet that an L3C can be a 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. It is possible that foundations that have invested in L3Cs could lose their tax exemption status and it is a risk many are not willing to make.

The Bottom Line

The L3C is not for everyone but it might be a good fit for some motivated ventures. Anyone interested in creating a for-profit vehicle with a charitable or educational objective may wish to consider an L3C.