If you’ve been following Innov8Social, you will have noticed a number of posts on benefit corporations. They are a new legal structures passed by a handful of states that are hybrid forms of business—entities that are for-profit and which aim to benefit society and the environment.
And you will have seen posts about flexible purpose corporations. Unique to California, this new type of business lets companies define a ‘special purpose’ such as a charitable or public purpose.
But benefit corporations and flexible purpose corporations weren’t the first legal structures introduced for social enterprise.
The first was the L3C, which was made its debut in Vermont in 2008—two years before the first benefit corporation bill was passed in Maryland.
What is an L3C?
A low-profit, limited liability company (L3C) is a type of limited liability company (LLC) that defines a specific socially beneficial mission, like a non-profit does. But unlike a non-profit, it allows profits to be distributed to owners.
L3C’s retain the protection of traditional LLC’s, such as limitation of personal liability of owners. And, like LLC’s, the company is not taxed like a corporation—with taxes, instead, flowing to individual members.
The legislation required to enact L3C is an amendment to a state’s current LLC legislation, rather than a separate bill.
L3C’s Aim to Make it Easier for Foundations to Invest in For-Profit Ventures
One of the key reasons for the creation of the L3C was to simplify investment to social businesses by foundations. To invest in a for-profit enterprise, private foundations must invest in IRS sanctioned program-related investments (PRI’s).
L3C’s aim to to streamline the process of approving a for-profit as a PRI by virtue of the outlined purpose of an L3C as being to serve a charitable purpose (like non-profit). However, L3C’s must request approval from IRS to be considered a PRI.
Hurdles Faced by L3C’s
The Nonprofit Law blog outlines a few hurdles that L3C’s have faced. These include:
- No federal recognition of L3C’s as PRI’s. L3C supporters had submitted proposals for ways in which L3C’s could be more easily ruled as a PRI. This would make L3C’s more of a favorable investment opportunity for private foundations. These proposals have not yet passed.
- Some state opposition. There has been some opposition presented by committees within the American Bar Association with regards to elements of the L3C structure.