Tippy Tippens is the owner of Matter L3C, one of the earliest registered L3C's in Louisiana. Photo courtesy of matternola.com.
A couple of weeks ago, I discussed the Benefit Corporation, a new business entity which puts social entrepreneurship before profits. The Louisiana legislature has yet to pass a law allowing the new business entity, but we are one of only about 8 states that has passed legislation authorizing the Low-Profit Limited Liability Company (L3C).
Born in Vermont in April 2008, the L3C is a subset of the traditional LLC and is intended to provide for a mixture of for-profit and tax-exempt investors. The primary goal of an L3C must be to achieve a social benefit, with profit as a secondary purpose.
That is the key difference between an LLC and L3C. The name itself, “low-profit,” is a bit of misnomer because the business is not restricted in how much profit it can make.
L3C Requirements
The Louisiana L3C must meet three requirements to earn and retain its special status:
- There must be a charitable or education purpose, within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code (IRC).
- No significant purpose of the L3C may be the production of income or the appreciation of property (The L3C can do those things, it just can’t be a significant purpose).
- The goal of the L3C must not be to for a political or legislative purpose.
If one of these goals is not met, the entity still continues to exist, but it will immediately revert to the status of an LLC under state law.
How to Use the L3C
According to the IRS, the L3C is not a nonprofit and is not tax-empty unless all of its investors are tax-exempt entities. The L3C bridges the gap between for-profit entities and nonprofit entities, specifically private foundations.
Private foundations may make “program related investments,” otherwise known as “PRIs.” PRIs are investments made by private foundations in a for-profit venture that are in furtherance of the foundations’ charitable, educational, or religious activity.
Private foundations have to be careful with such an investment in a PRI because it could jeopardize the foundation’s exempt purpose, which in turn could jeopardize its tax-exempt status with the IRS. The L3C rectifies this concern.
Caution: New Entity
Since the L3C is so new, there is little, if any legal precedent for this type of business entity, so there’s still some uncertainty as to how it will be treated by the courts. Other questions arise as to who will revoke a license and when is it revoked if the L3C falls out of compliance with the three requirements above.
It’s possible that the L3C is the right business entity choice for an organization whose goal is a charitable or educational purpose.