Recently in LLCs (Limited Liability Companies) Category

February 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).

February 6, 2010

A Nonprofit LLC?

In our last post we introduced a new type of LLC, the series LLC. Here we'll talk about another interesting way to use the limited liability company, the nonprofit LLC.
Nonprofit LLCs are usually formed by larger nonprofit corporations to house some of their activities. Some larger tax-exempt nonprofit organizations like to segregate nonprofit funds or assets in a nonprofit LLC. The assets of the nonprofit LLC must be irrevocably dedicated to nonprofit purposes, and the LLC cannot pay out profits to its members. 
As another strategy, some larger nonprofits form a regular profit-making LLC to place a limited liability shield around some of the nonprofit's unrelated business activities (activites that bring in a profit and are only tangentially related to the nonprofit's mission). As long as the LLC's income and activities are insignificant, relative to the overall income and activities of the parent nonprofit, this arrangement may pass muster with the IRS. The parent nonprofit has to pay income taxes on profits it receives from its LLC subsidiary. Next, up a hybrid LLC called the L3C, which has a mix of profit and nonprofit motives. 

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

February 1, 2010

New Types of LLCs on the Horizon

There are three new types of LLCs (limited liability companies) that have come along in the past year or so: the series LLC, the LC3, or "low-profit limited liability company," and the nonprofit LLC. Each is unique and limited in scope and purpose. 
The series LLC allows LLC members (the owners) to own interests in different series of assets and to collect ifferent revenue streams from the LLC. So far, only fourteen states currently allow for the formation of a series LLC: Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Mississippi, Nevada, North Dakota, Oklahoma, Tennessee, Utah, Virginia, and Wisconsin. 
The main characteristic and advantage of the series LLC is that it allows the LLC to set up one or more series of assets within the LLC. Each series is administered separately from the other series, which means that separate businesses and properties can be subsumed into one LLC entity, but the business and assets of each series can be managed and operated separately from the business and assets of the other businesses. For example, each series can have separate owners and managers, a separate LLC operating agreement that specifies a separate division of profits and losses associated with the series, and other separate formation and operation characteristics.
An important aspect of some states' statutes regarding series LLCs is that each business is insulated from the liabilities of the other businesses within the LLC. A series LLC can work well to insulate multiple real property parcels owned by a real property developer. It may also work for an LLC engaged in separate lines of business that have unique legal liabilities attached to each business. Generally, however, for locally owned and operated small businesses, it is unnecessarily costly and complex to form a series LLC.
We'll talk about the nonprofit LLC and the LC3, or "low-profit limited liability company, in our next posts.

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