The Low-Profit Limited Liability Company

Social entrepreneurs have a number of choices when it comes to selecting the best business organization structure to achieve their socially conscious mission.

Initially, social entrepreneurs usually consider whether to be nonprofit or “for profit.”

  • Nonprofit: Tax exempt nonprofit corporations provide tax benefits to both the organization and donors, but can pose challenges to entrepreneurs looking to make profits and encourage private investment.
  • For-profit with a social purpose: The social entrepreneur looking to start a for-profit corporation with a social purpose can consider Benefit corporations and B Corps and a little known business organizations called an L3C.

L3C: a new form of limited liability company – the low-profit limited liability company

The L3C is a hybrid of a “for profit” and nonprofit organization, and has characteristics of each.

    • As with a nonprofit, an L3C must be formed in furtherance of some charitable or educational purpose or mission.
    • However, as with a for profit entity, an L3C may have equity owners who have the right to receive distributions of profits and appreciation in the value of the business entity.
    • While the entity functions similar to a traditional limited liability company, an L3C is required to carry on a business that has a charitable purpose, but is allowed to generate modest profits from its business.

Funding

L3Cs can take advantage of both traditional funding through debt and equity financing as well as generating funding from private charitable foundations.

    • For-profit business organizations, community foundations, private foundations, public charities, governments, and individuals interested in promoting community development and revitalization are all candidates to invest in an L3C.
    • In turn, private charitable foundations such as family foundations and community foundations can invest money into qualified L3Cs and can likely claim the investment as program related investment (“PRI”).

Taxes

L3Cs cannot qualify as a tax-exempt organization under 501(c)(3) of the Internal Revenue Code unless it meets certain criteria. To be tax-exempt, all of its members must themselves be tax-exempt organizations, and the IRS has established 11 other criteria to qualify for federal tax exemption. While it may be appropriate for certain L3Cs to seek tax-exempt status, assuming they meet the criteria established by the IRS, most L3Cs are expected to be for profit entities that must pay taxes on income.

State Business Structures

State legislatures are encouraging investment in social entrepreneurs by recognizing L3Cs as distinct business organizations. L3Cs are recognized business organizations under state law in many states.

Of course social entrepreneurs located in other states without L3C legislation can form their L3C in one of the states that do allow for that business organization and then register the L3C as a foreign LLC doing business in their state.

Learn more about alternatives for the social entrepreneur

The Cullinane Law Group exclusively serves nonprofits and social entrepreneurs with desire to pursue profits and the social good. Our lawyers specialize in the formation and start up of nonprofit and for-profit corporations such as L3Cs. Contact us to learn more about our flat-rate start up packages.