Feb 11, 2010

The L3C LLC: Low-Profit Limited Liability Company

In our last two posts, we talked about the series LLC and the nonprofit LLC. Here's one more: the L3C, or LLLC.
L3C is a nickname for a "low-profit limited liability company." Why would anyone go into business to make little profit? Similar to a nonprofit, an L3C is organized to perform services or engage in activities that benefit the public. But a L3C is run like a regular profit-making business and is allowed to make a profit as a secondary goal. 
A small but growing number of states, including Illinois, Michigan, Utah, Vermont, and Wyoming, allow L3Cs. These states' LLC statutes set out the purposes for which an L3C company can be formed; the statutes are modeled on the IRS requirements for program-related investments (PRIs). However, the IRS has not yet ruled on whether investments in L3Cs will qualify as PRIs. The idea behind an L3C is to allow public-spirited LLCs to receive seed money from large nonprofit foundations. But because the IRS has not yet ruled on this issue, because L3Cs are not automatically qualified as tax-exempt nonprofit organizations under federal and state tax laws, and because they may not be eligible to receive foundation funds without the addition of restrictions to their articles of organization or operating agreement, they face challenges finding credibility in the real world of nonprofit-foundation funding. 
Update: I just read a February 9 article on L3C companies written by Malika Zouhali-Worrall of CNN Small Business, focusing on a farmer-owned milk processing company in Maine. An interesting example of how the L3C structure can be used.

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).