Monday, April 28, 2014

Non & Low-Profit Limited Liability Company, L3C

Overview of the L3C, or Low-Profit Limited Liability Company:

The L3C, or Low-Profit Limited Liability Company, is a new type of corporate entity that is a cross between a nonprofit and a for-profit corporation. L3Cs are not eligible for tax-exempt treatment by the IRS. Rather, they are intended to be profit-generating entities with charitable and educational (including positive social change) missions as their primary objectives. Building upon the LLC structure, the L3C has thus far been enacted in Vermont (May 2008), Michigan (January 2009), Utah (March 2009), Wyoming (July 2009) and Illinois (Jan 2010). L3C legislation is also being considered in several other states, including Georgia, Louisiana, Maine and Missouri. For more information about the status of L3C legislation please visit:

The Nevada legislature has not passed any legislation authorizing L3Cs as of July 2011. However, all states must recognize LLCs formed in other states and the L3C is a variant form of an LLC.

L3Cs are similar to LLCs in that they have the liability protection of a corporation, the flexibility of a partnership and membership shares can be sold to raise capital just like common stock. However, unlike the LLC, the L3C must be formed for a charitable or educational purpose, it cannot have a significant goal of producing income or capital appreciation and it may not accomplish political or legislative objectives.

L3Cs are intended to be vehicles which can both attract capital investment from for-profit enterprises and investment by foundations. Nontraditional for-profit investors who are willing to sacrifice market-level returns in exchange for social impact are prime candidates to provide capital investments or loans to L3Cs. Similarly, private foundations that wish to provide support in the form of a loan or equity rather than a grant may find an L3C to be attractive because the enabling legislation is written in such a way as to comply with the IRS “program related investment” or “PRI” regulations, thus eliminating the need for private letter rulings or legal opinions for such investments. PRIs can be attractive to foundations because they count toward its 5% minimum payout requirement, just as if they were grants. But if the investment is successful, the foundation could recapture the full amount of the investment, plus a reasonable rate of return, which it then must pay out again in the form of grants or more PRIs.

Existing nonprofit corporations can utilize the L3C structure in at least two ways. First, if the nonprofit generates enough earned income to qualify as “low profit,” it could reincorporate as a stand-alone L3C. Second, it could establish a subsidiary as an L3C to conduct low-profit earned income activities.

It is too early to tell whether L3Cs will proliferate and whether they will attract significant investments from non-traditional investors and foundations. Some experts have predicted that since PRIs comprise a relatively small amount of foundation grants and capital, the L3C will not succeed in attracting significant funds from foundations and thus this form of organization will not become the preferred vehicle.

The L3C is taxed like any other for-profit entity and is not eligible for tax exemption under Section 501(c)(3) of the Internal Revenue Code.  L3Cs hope to encourage an influx of new capital into charitable causes that are too risky for for-profit ventures and that nonprofit dollars alone cannot sustain.  The L3C effectively creates a market for investment in companies that offer low rates of return, but contribute to the community, unlike the non-profit, which offers no rate (and sometimes a negative rate) of return on investment.  Therefore, if an entity has a charitable mission, but does not believe it can be profitable, or has a social mission, but probably could not secure program-related investments ("PRIs") from private foundations, it would be better off forming as a not-for-profit or for-profit entity, respectively.


Program-Related Investments

IRS on Program-related investments (PRI) are those in which:

The primary purpose is to accomplish one or more of the foundation's exempt purposes,

Production of income or appreciation of property is not a significant purpose, and

Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

In determining whether a significant purpose of an investment is the production of income or the appreciation of property, it is relevant whether investors who engage in investments only for profit would be likely to make the investment on the same terms as the private foundation.

If an investment incidentally produces significant income or capital appreciation, this is not, in the absence of other factors, conclusive evidence that a significant purpose is the production of income or the appreciation of property.

To be program-related, the investments must significantly further the foundation's exempt activities.  They must be investments that would not have been made except for their relationship to the exempt purposes.  The investments include those made in functionally related activities   that are carried on within a larger combination of similar activities related to the exempt purposes.

The following are some typical examples of program-related investments:

Low-interest or interest-free loans to needy students,

High-risk investments in nonprofit low-income housing projects,

Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available,

Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents, and

Investments in nonprofit organizations combating community deterioration.

Once an investment is determined to be program-related, it will continue to qualify as a program-related investment if changes in the form or terms of the investment are made primarily for exempt purposes and not for any significant purpose involving the production of income or the appreciation of property.  A change made in the form or terms of a program-related investment for the prudent protection of the foundation's investment will not ordinarily cause the investment to cease to qualify as program-related.  Under certain conditions a program-related investment may cease to be program-related because of a critical change in circumstances, such as serving an illegal purpose or serving the private purpose of the foundation or its managers.

If a foundation changes the form or terms of an investment, and if the investment no longer qualifies as program-related, it then must be determined whether or not the investment jeopardizes carrying out its exempt purposes.

An investment that ceases to be program-related because of a critical change in circumstances does not subject the foundation making the investment to the tax on jeopardizing investments before the 30th day after the date on which the foundation (or any of its managers) has actual knowledge of the critical change in circumstances.
The L3c can also be used in a variety of other types of for profit with donations made to other types of education. It looks to me that you can make a profit, protect the principle and take a good salary, while donating a certain percentage (5%) of the profits and take good tax deductions,  all at the same time. If business, profit, salary, protecting the principle and donating back to the community are the goals you want to accomplish this would be a good vehicle to use for those goals.

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