Professor Cass Brewer (Georgia State Law) recently posted a draft of his article, Seven Ways to Strengthen and Improve the L3C. His article was prepared for Regent University School of Law’s Symposium on Emerging Issues in Social Enterprise.
While Professor Brewer recognizes that the L3C is flawed in its current form, he does not stop there. Professor Brewer should be commended for exploring and proposing creative, potential solutions.
The abstract of the paper is as follows, and the entire article is well worth your time:
The raison d’être for the low-profit limited liability company (“L3C”) is to encourage program-related investments (“PRIs”) by private foundations. PRIs are special types of investments that can be both charitable and profitable. PRIs have been embraced by knowledgeable scholars, practitioners, foundation managers, and even the U.S. Treasury Department. Further, the L3C and PRIs are associated with the growing “social enterprise” movement. The L3C thus would seem to be in the right place at the right time and should have the full support of the charitable sector, practitioners, and lawmakers.
Yet, after a fast start, adoption of L3C legislation across the U.S. has stalled. In fact, several states recently have considered L3C legislation and have either rejected it outright or deferred its passage indefinitely. Many highly-regarded scholars and practitioners adamantly oppose the L3C, even though those scholars and practitioners generally endorse PRIs. This slow pattern of adoption and strong opposition to the L3C contrasts sharply with the rapidly increasing acceptance of another type of “social enterprise” entity, the benefit corporation.
Why is L3C legislation languishing? Because the L3C suffers from the following fundamental defects: (i) except in name, the L3C is indistinguishable from a regular LLC; (ii) without any type of statutory enforcement mechanism, the L3C lacks accountability and transparency; and (ii) because the L3C promises more than it can deliver absent new federal legislation, the L3C fails of its essential purpose of encouraging PRIs. Given these defects, the L3C’s opponents maintain that the L3C is a well-intentioned but nonetheless failed experiment that should be abandoned.
This article argues that even though the L3C in its current form is defective, the L3C should not be abandoned. Instead, the L3C can be a viable tool for tax-exempt organizations and PRIs if the current statutory framework is strengthened and improved. With the foregoing premise in mind, this article proposes seven relatively simple but impactful changes that would strengthen and improve the L3C statutory framework. If the L3C becomes more than just a brand, then perhaps the L3C can fulfill its raison d’être.