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L3C PART 1: SO, WHAT IS AN L3C?

Many social entrepreneurs have been faced with choosing between traditional non-profit and for-profit legal structures, neither of which perfectly fit the myriad their organization’s goals and needs. In an attempt to fulfill this void, Robert Lang, CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation, Marcus Owens, a partner in Caplin & Drysdale, the preeminent Washington DC tax law firm, Arthur Wood, the Director of Social Financial Services for Ashoka, partnered with Americans for Community Development, a coalition of organizations dedicated to bringing for profit metrics and financing to as many social enterprises, to create the L3C.

Since its inception, the L3C is becoming an increasingly popular legal structure for social entrepreneurs that want to put mission first and profits second.  “The L3C is a new form of limited liability company which combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit. It is the for-profit with a nonprofit soul,” according to Americans for Community Development.

The Basics

L3Cs are for-profit organizations that pay tax on profits and cannot receive traditional grants or tax-deductible charitable contributions. However, L3Cs are designed to receive private foundation support, government funding, and traditional investment capital. How is this accomplished? Nonprofit Law Blog answers the question thusly:

“The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.


A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations can only directly invest in for-profit ventures qualified as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether they would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to verify that the venture is a valid PRI. An L3C’s operating agreement minimizes this problem by specifically outlining its respective PRI-qualified purpose in being formed, making it easier for foundations to identify social-purpose businesses as well as helping to ensure that their tax-exemptions remain secure.”

The Bullet Points:

WHAT IS AN L3C?

  • A type of LLC.  L3C = Low Profit Limited Liability Company
  • The L3C is a for­profit entity – it is NOT a charity or nonprofit entity
  • The L3C is a flexible LLC designed to allow a mix of foundations, trusts, endowments, pension plans, individuals, corporations, and governmental entities to partner in order to achieve social objectives while operating in a for­profit business structure.
  • Just like any LLC, an L3C has the liability protection of a corporation and the flexibility of a partnership.
  • Unlike the standard LLC, it is explicitly formed to further a socially beneficial purpose and qualify as a Program Related Investment for private foundation partners.
  • This flexible structure allows for greater financing structures to be utilized in structuring social ventures.
  • The L3C is becoming a brand that signals customers, employees, and communities that a company has a charitable or educational purpose, despite making a profit.

(Above adopted from: The L3C ­low profit limited liability company, A Social Venture Legal Structure, By:  Ray Dinning, JD, LLM, Offit Kurman Law Firm)

A NEW ROAD FORWARD

Have you ever tried to organize a social enterprise and find yourself frustrated by your options for legal structure? Well… we know the feeling. As a social entrepreneur and an attorney, I’ve dealt with this frustration both personally and on behalf of my clients.

As a leader of a social enterprise, you are an innovator, but the current structures stifle that innovation. You are forced to chose between two out-moded options: either organize as a for-profit or nonprofit entity, and maybe use some Frankenstein-like techniques to find something that sort of works, but is sub-optimal to say the least. The bottom line is that neither the for-profit not the nonprofit entity addresses the needs of social enterprise.

There must be a new road forward.

Fortunately, there is a group of legal minds around the country that are starting to cut a new road across the U.S. legal landscape. We are creating a new corporate form that will empower social enterprises. This is an exciting time in the social enterprise movement as a whole, but specifically in the legal structures supporting the movement.

This blog is a space dedicated to discuss and disseminate information on the legal structures, both old and new, including Nonprofit, For-Profit, L3C, the For-Benefit Corporation and other emerging legal structures connected to the social enterprise movement. We hope that be aggregating and curating the knowledge about this area of law, social enterprises will have an understanding of all their options, and make decisions that will set them up for success.