CAMPOLO'S
NOT-FOR-PROFIT UPDATE
(Posted Feb 16, 2012)
An L3C, or low-profit, limited liability company is a relatively new type of company intended to put social goals ahead of making profits. These part social benefit and part low-profit entities are popping up around the country as a way to bridge the socially beneficial missions of nonprofits with a more traditional for-profit business model.
More specifically, the L3C is a variation on the Limited Liability Company, designed to take advantage of both non-profit and for-profit sources of capital. As the term "Low-Profit" suggests, an L3C typically engages in socially-beneficial activities which may not be lucrative enough to attract sufficient commercial investment. By using a tiered capital structure, the L3C can potentially attract a diverse group of creditors to finance its operations, including private foundations. An L3C may offer a marketing advantage over the standard LLC in attracting socially-conscious investors and consumers and socially-conscious for-profit entities.
Unlike a standard LLC, which can be organized for any lawful business purpose, an L3C must operate to significantly further a charitable goal as required by IRS regulations and only a secondary profit concern. But unlike a charity organization, the structure can be supported by money from foundations and is free to distribute profits, after taxes, to owners or investors.
The L3C's primary advantage is its ability to raise funds, particularly during economically trying times, when banks are reluctant to loan and angel investors are hard to find. By becoming an L3C, a business is better positioned to receive a mix of investments from both traditional sources and nonprofit foundations. The latter source of funding is especially compelling, because foundations must make Program Related Investments (PRIs) annually to the tune of at least five percent of their assets in order to keep their tax-exempt status.
First established in Vermont in 2008, L3Cs can now also be formed in Illinois, Michigan, Utah, Wyoming, North Carolina and Maine. L3Cs can be operated for a range of purposes including religious, educational, scientific, or literary ones. While there are clear benefits to these flexible-purpose corporations, the movement to get more states on board with these new legal structures is not without opposition. Executives in charge of charities fear the increased competition for philanthropic dollars, while many corporate lawyers and regulators cite concerns over conflict of interest and standards of fiduciary duty that alternative structures like these raise.
It's important to keep in mind that despite its socially-conscious mission, an L3C is not a tax-exempt organization under Section 501(c) of the Internal Revenue Code, and donations and investments in L3Cs are not tax deductible. Since the profits of an L3C "pass through" to its members and are taxed at individual rates, L3Cs operate like standard LLCs for federal tax purposes.
