A low-profit limited liability company (L3C) is a legal form of business entity in the United States. Commonly referred to as a hybrid structure, it has characteristics of both for-profit and non-profit entities. L3Cs were created to comply with the Internal Revenue Service (IRS) program-related investments (PRIs) rules which allow most typically private foundations the ability to maintain tax-exempt status through investments in qualifying businesses and/or charities. With a social mission as the primary objective and a secondary objective of profit generation, the L3C legal form is considered a viable option for businesses seeking a reputation or marketability for being a social enterprise.
Background & Concept
The L3C structure was designed by Robert M. Lang, Jr., who was the CEO of a New York-based family foundation. Lang developed the structure as a way for foundations to clear tax and regulatory hurdles when it came to donations. With the first L3C statute being enacted in 2008, L3Cs are considered a relatively young legal form of business entity. In 2013, there were 711 L3Cs throughout the United States and by 2020 there were 1,700 L3Cs.
As stated, an L3C is a for-profit, social enterprise venture that has a primary goal of performing a socially beneficial purpose with a secondary goal of maximizing profits. It is a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a non-profit organization, and the branding and market positioning advantages of a Benefit Corporation. The L3C is obligated to be mission-driven by law which gives a clear order of priorities while also aligning with Lang's initial design intention of being a structure that can take donations from foundations.
The L3C makes it easier for socially oriented businesses to attract investments from foundations and additional money from private investors. Unlike the traditional LLC, the L3C's articles of organization are required by law to mirror the federal tax standards for program-related investing. 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 in order to maintain their tax-exempt status. While foundations usually meet this requirement through grants, investments in L3Cs and charities that qualify as PRIs can also fulfill the requirement while allowing foundations to receive a return.
General Characteristics
While L3Cs are a separate legal form of business entity, L3Cs structure most closely emulates that of a limited liability company (LLC). The most notable difference between L3Cs and LLCs is that L3Cs are required to have a socially beneficial mission as their primary objective. Below are several noteworthy characteristics of L3Cs:
Formation
L3Cs are formed by filing articles of organization with the Secretary of State within a state that has L3C statute provisions. For businesses primarily operating in a state without L3C statute provision, it is possible to still legally form as an L3C by (1) incorporating in a state with an L3C statute provision, (2) registering as a foreign business doing business in that particular state, and (3) appointing a registered agent within that particular state. Within the articles of organization, the Registered Agent will be designated. It is important to note that many states have an initial filing fee along with an annual fee and annual report filing requirement necessary for an L3C to maintain its legal status.
Following filing, the members of the L3C must execute a formal operating agreement. In the operating agreement, L3Cs need to define its purpose per the provisions of IRS Treasury Regs.Sec.53.4944-3(a):
an L3C must significantly further the accomplishment of one or more charitable purposes; the production of income and appreciation of property cannot be a significant purpose of the L3C; and an L3C cannot seek to accomplish any political or legislative purposes
In addition to meeting IRS Treasury Regs.Sec.53.4944-3(a), many states require the label "L3C" or "low-profit limited liability company" to appear in the name of the organization. It is important to understand that each state may have state-specific requirements that govern L3C formation.
Duration
The lifetime or duration of an L3C usually extends beyond the life of its members because it takes on its own legal personhood. Thus, the death or withdrawal of a member does not impact the existence of the L3C.