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Low-profit limited liability company

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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 by simplifying compliance with Internal Revenue Service rules for program-related investments, a type of investment that private foundations are allowed to make.[1][2][3][4]

Concept

An L3C is a for-profit, social enterprise venture that has a stated goal of performing a socially beneficial purpose, not maximizing income.[5][6] It is a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit organization, and the branding and market positioning advantages of a social enterprise.[7] The L3C is obligated to be mission-driven so there is a clear order of priorities for its fiduciaries.[2]

The L3C is designed to make it easier for socially oriented businesses to attract investments from foundations and additional money from private investors.[8] Unlike the traditional LLC, the L3C's articles of organization are required by law to mirror the federal tax standards for program-related investing.[9] A program-related investment (PRI) is one way in which foundations can satisfy their obligation under the Tax Reform Act of 1969 to distribute at least 5% of their assets every year for charitable purposes.[7] While foundations usually meet this requirement through grants, investments in L3Cs and charities that qualify as PRIs can also fulfill the requirement while allowing the foundations to receive a return.[10]

Legislation

An L3C is established pursuant to the law of the state in which the entity is formed. To authorize the organization of an L3C, legislation must be passed that amends the state's general limited liability company law. Thus far, legislation has been passed in Illinois, Kansas, Louisiana, Maine, Michigan, North Carolina (authorizing legislation repealed in 2013), North Dakota, Rhode Island, Utah, Vermont, and Wyoming and the federal jurisdictions of the Crow Indian Nation of Montana and the Oglala Sioux Tribe.[11][12] As of January 11, 2013, the Secretaries of State of the ten states and two Indian Nations that authorize them reported that 711 active L3Cs are in operation.[13] HB 1299 was introduced on January 14, 2013 in North Dakota, which would authorize the organization of L3Cs. Legislation has been written for 26 additional states but has not yet been introduced.[14]

In May, 2012, the IRS released proposed regulations that broaden the landscape of what constitutes an acceptable PRI by adding nine new examples of investments that would qualify, along with some general principles.[15] An amendment to the Illinois L3C law that would allow for a more expansive description of the purposes for which L3Cs can be created, consistent with the proposed examples of PRIs set forth by the IRS in 2012, unanimously passed the Illinois Senate on April 17, 2013, and has been referred to the Illinois House Rules Committee.[16][17] The expanded clause would make Illinois the first state to authorize L3Cs whose purposes may reflect the whole range of statutorily sanctioned PRIs to include religious, scientific, and literary organizations.[13][18][19] Legislation is also pending at federal level that will simplify the process for receiving IRS approval that an investment qualifies as a PRI.[20]

As of January 1, 2014, North Carolina no longer authorizes L3Cs; however, current L3Cs can continue to use the designation.[2]

See also

References

  1. ^ Witkin, Jim (15 January 2009). "The L3C: A More Creative Capitalism". The Triple Pundit. Retrieved 25 July 2011.
  2. ^ a b c Field, Anne (4 May 2012). "IRS Rule Could Help the Fledgling L3C Corporate Form". Forbes. Retrieved 17 September 2012.
  3. ^ Guy, Sandra (30 August 2015). "Sunday Sitdown with Marc J. Lane: Use Business to Fix Social Problems". Chicago Sun-Times. Retrieved 1 September 2015.
  4. ^ Guy, Sandra (26 August 2015). "Sitdown: Attorney Marc J. Lane". Chicago Sun-Times. Retrieved 1 September 2015.
  5. ^ Capriccioso, Caryn; Zwetsch, Rick; Shaver, Erin (May 2010). "Who is the L3C Entrepreneur?". InterSector Partners, L3C. {{cite journal}}: |format= requires |url= (help); Cite journal requires |journal= (help)
  6. ^ Zouhali-Worrall, Malika (2010-02-09). "For L3C companies, profit isn't the point". CNN Money. Retrieved 25 July 2011.
  7. ^ a b Lane, Marc (December 2011). "Social Enterprises: A New Business Form Driving Social Change". American Bar Association. The Young Lawyer. 16 (3). Retrieved September 18, 2012.
  8. ^ Williams, Grant (12 November 2009). "Dozens of Companies Are Sprouting With the Same Goal: Doing Good". Philanthropy Today. The Chronicle of Philanthropy.
  9. ^ Stankorb, Sarah (8 March 2012). "Where Did Social Enterprise Come From, Anyway?". GOOD Worldwide. Retrieved 18 September 2012.
  10. ^ Segal, Jeff (12 October 2012). "How Social Entrepreneurship is Changing Chicago (and the World)". Technori. Retrieved 31 October 2012.
  11. ^ Federal and State Taxation of Limited Liability Companies, ¶2602.01 (CCH / Wolters Kluwer 2014 Ed.)
  12. ^ "L3C Legislation". Americans for Community Development. Retrieved 25 July 2011.
  13. ^ a b Lane, Marc; Bodor, Brandon; Agha, Mavara (January 2013). Preliminary Report (PDF) (Report). Governor's Task Force on Social Innovation, Entrepreneurship, and Enterprise.
  14. ^ "Considering Legislation in Your State?". Americans for Community Development. Retrieved 18 September 2012.
  15. ^ Examples of Program-Related Investments, 77 Fed. Reg. 23429, 23430 (2012).
  16. ^ S.B. 2359, 98th Gen. Assem. (Ill. 2013).
  17. ^ Six Month Report (PDF) (Report). Governor's Task Force on Social Innovation, Entrepreneurship, and Enterprise. April 2013.
  18. ^ Lane, Marc (16 September 2013). SEA-Chicago and the Illinois Task Force on Social Innovation, Entrepreneurship, and Enterprise: A Strategic Partnership (Report).
  19. ^ Marc J. Lane (March 11, 2014). "Emerging Legal Forms Allow Social Entrepreneurs to Blend Mission And Profits". Triple Pundit.
  20. ^ "Council on Foundations, Americans for Community Development Applaud Reps. Schock and Polis for Introducing Philanthropic Facilitation Act". Americans for Community Development. 15 November 2011. Retrieved 18 September 2012.
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