Spanning For-Profit and Non-Profit Designation, An L3C Backgrounder
Social entrepreneurs are often challenged by the legal structure of their new enterprise. These entrepreneurs weigh a long list of pros and cons between for-profit and non-profit. A new entity, the Low-Profit Limited Liability Company (L3C).
This email from Martin Montero (@montero on Twitter — worthy of a follow), co-founder of the Austin Social Innovation Hub outlines the new legal structure of the L3C. Posted with his permission for your interest:
Summary
“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”.L3Cs are low-profit limited liability corporations (LLC), which function 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 is run 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 June 2009, an L3C can only be formed in the states of Michigan ,Vermont, Wyoming, Utah and the Crow Indian Nation.”
Here are some valuable resources to give you some excellent background on many of the important aspects of the L3C. What it is, what it isn’t, how it works, the flexibility, the power, some initial case studies, and tons of ideas to help you think about how an L3C might work for you!
Text of the law
Low-Profit Limited Liability Company (L3C)A low-profit LLC is a new type of company, called an “L3C.” Vermont is the first state to enact this new type of company. The Low-profit Limited Liability Company is a cross between a nonprofit organization and a for-profit corporation. The entity is designated as low-profit with charitable or educational goals. Any entity seeking 501(c)(3) status would still want to organize as a non-profit corporation, under T.11B, to qualify for that tax status.
Organizing the L3C is the same as the regular LLC except that the l3c designation must be indicated when the articles of organization are filed and the name must include the words “L3C” – Section 3005(2).The organization form has been amended to include the l3c designation. The filing fees, amendments, agent requirements, etc. including the annual report filing has not been changed and applies to both. The basic purpose of the L3C is to signal to foundations and donor directed funds that entities formed under this provision intend to conduct their activities in a way that would qualify as program related investments.
T.11, Ch 21 Section 3001(27) reads as follows:
“L3C” or “Low-profit limited liability company” means a person organized under this chapter that is organized for a business purpose that satisfies and is at all times operated to satisfy each of the following requirements.
(A) The Company significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the IRS Code of 1986, 26 U.S.C. Section 170 (c)(2)(B); and (ii) would not have been formed but for the company’s relationship to the accomplishment of charitable or educational purposes.
(B) No significant purpose of the company is the production of income or the appreciation of property; provided, however, that the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.
(C) No purpose of the company is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the IRS code of 1986, 26 U.S.C. Section 170(c)(2)(D).
(D) If a company that met the definition of this subdivision (27) at its formation at any time ceases to satisfy any one of the requirements, it shall immediately cease to be a low-profit LLC, but by continuing to meet all the other requirements of this chapter, will continue to exist as a limited liability company. The name of the company must be changed to be in conformance with subsection 3005(a).
http://www.sec.state.vt.us/corps/dobiz/llc/llc_l3c.htm
Further reading
A very good LC3 break down at Wikipedia, includes:Background
Legal structure
Capital structure
Tax implications
Advantages
Legislation
