The L3C or Low Profit Limited Liability Company is a relatively newform of the LLC (Limited Liability Company), that, for now, is onlyknown about and talked about by its advocates, but is quickly spreadingacross the nation and becoming a revolutionary new way of doingbusiness.
The L3C differs from the LLC in that the primary purpose of the L3Ccannot be to make a profit, but rather the purpose of the business mustbe to achieve a social benefit, with profit as a secondary or ancillarypurpose. The name itself, Low Profit Limited Liability Company, is abit of a misnomer. The business is not restricted in how much profit it can make at all. ‘Show me the Money’ just can’t be the number onegoal.
“The L3C must be organized and operated at all times to satisfy the following requirements:
1. The company must “significantly further the accomplishment of oneor more charitable or educational purposes,” and would not have beenformed but for its relationship to the accomplishment of suchpurpose(s);
2. “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted toearn a profit); and
3. The company must not be organized “to accomplish any political or legislative purposes.” Wikipedia.com
On a practical level, the L3C does a few things for business owners. It provides all the benefits of an LLC structure, including flexibility in ownership, management, decision making power, and profitdistributions. It is still a pass through entity for tax purposes andhas very little ongoing administrative and corporate governanceburdens. For the socially minded business, in my previous post Clean Tech Law: Pros and Cons of the B-Corp for Serious Triple-Bottom-Line Business, I addressed how B-Corp certification provides credibility to a business as well as shields the management from shareholder lawsuits for makingthe sustainable or social decision as opposed to the most economic one. The L3C provides both that credibility and liability protection for the owners and management, while leaving enforcement to the state and notsubjecting the business to periodic audits by a third party. Plus,great branding and marketing opportunities.
Additionally, and here is the best part…………..the L3C bridges that gap between non-profits and for profits. Due to the restrictions on an L3C and the requirements for establishing one (see above), the L3C complies with the IRS rules for “Program Related Investments” (PRIs) and opensup possibilities for this additional source of financing. PRIs areinvestments made by Private Foundations to for-profit ventures that arein furtherance of a charitable, educational, or religious activity. They are generally high risk/low reward investments. Many PrivateFoundations shy away from making significant PRIs because of thedifficulty in verifying that the for-profit is using the funds infurtherance of an eligible activity. Hmmmm written into the corporatecharter and mandated by state law…………..problem solved!*
So here is an entity that solves a lot of problems existing as aresult of there being no middle ground between the non-profit andfor-profit entities. Many non-profits spend more time asking for moneythan they do executing on their mission, due to the restrictions onrevenue streams. For-profits, due to shareholder interests and taxdeduction restrictions, have been struggling with maintaining a socialmission. This is an entity that allows for investment and ownership,just as in a for-profit, but can also exist for charitable, educational, or religious purposes. The L3C is that perfect gray area, middlechild.
So why would a clean tech company find this model appealing? Well it depends on what you are doing and what your mission is. SocialEntrepreneurship is on the rise and clean tech is a great industry forit. Research and Development costs are high but the ultimate goal isoften altruistic. If your goal is to produce low cost alternativeenergy production methods, increase consumer access and making themaffordable solutions for developing countries, well then this may workfor you. Are you looking to build green communities? Are you the onelaptop per child project? E-waste rehabilitation? Water purification? The list can continue forever. Most technologies in this space havesignificant social benefits; it is all a matter of your mindset andultimate goals.
For those businesses that do want to have a impact on the world 1st and make money 2nd, this structure gives you credibility, liability insulation, branding,access to PRIs as funding, and access to many government R&D grantsthat require you to be a for-profit entity.
As of now, the L3C is available in Vermont, Michigan, Illinois,Wyoming, Utah, The Crow Indian Nation, and the Oglala Sioux Tribe. North Carolina, Maine, Louisiana and New York have passed legislationand will start registering L3C’s shortly. Legislation for the L3C isunder consideration in Colorado, Georgia, Oregon, North Dakota,Tennessee, and Montana. Fingers Crossed! I am hoping thatMassachusetts will jump on board soon. The L3C is spreading rapidly and entrepreneurs across industries are starting to explore the doors thatit can open.
*The Down Side: Of course, nothing is everperfect. For starters, the L3C limits you to an LLC structure and theequivalent for a C-corp is not around just yet. There is no operatinghistory for this entity, so the legal and tax repercussions areundetermined. Most L3C statues allow the state to revoke your L3Cstatus and convert you to an LLC if you don’t live up to your “primarypurpose” or start focusing more on money than on mission, but how doesthe state know that? How does the state determine it? What exactly isinvolved with the conversion and is there shareholder (member) liability there? This goes as well for the tax side of things. While the IRShas issued a few non-binding opinion letters, nothing definitive hasbeen said concerning whether investment in an L3C will qualify as aPRI. Many attorneys don’t want to touch the structure because thereare too many unknowns for their clients. I am one of those crazy earlyadopters that embrace taking calculated business risks and trying outthe new toys. J There are a growing number of us out there that see the potential and excited about these new opportunities for clients.
So bottom line, if you are socially minded, this could be a great entity for you, but tread carefully.
Another new development to watch out for is B-corp legislation, likethat being considered in California. Is there overlap and are wesetting ourselves up for a B-corp versus L3C showdown?! Guess you willhave to wait until next month to find out. I know that you are justDying!