L3Cs Background & Legislative Issues – A New Way to Organize Social Enterprise
By Robert Lang, January 2013 ( an excerpt)(click title above for full PDF)
Introduction - New Thoughts on the L3C
It has been a little over 4 years since the first L3C law passed in Vermont. It took 20 years from the time the first LLC law passed in Wyoming in 1978 until all the states had recognized the LLC. But how we are in era of instant gratification. So the question keeps getting asked, “if the L3C is so good why haven’t all the states passed the laws?”
L3Cs and the IRS
We constantly read papers about the L3C or get inquiries regarding the L3C and the IRS. They usually state in some manner that if or when the IRS rules on the L3C everything will be better. We hate to disillusion anyone but the IRS is not going to ever rule on the blanket acceptability of the L3C as an entity. They are empowered by statue to rule on each individual program related investment (PRI) on a case by case basis after the PRI has been made and, in most cases, reported on a 990PF by the foundation that makes the PRI. The IRS may also issue a private letter ruling (PLR) in advance, if so requested by the foundation, at considerable cost and time. But the PLR is applicable only to that specific case. The IRS has no preference positive or negative, as to business organizational structure. They are interested only in that the resulting structure uses the charitable invested dollars to further an allowable exempt purpose. Gates can make a PRI to Pfizer. Pfizer only need use that portion of its capital that it gets from Gates for the purpose specified, it does not mean all Pfizer activities must be charitable. The IRS has issued PLRs approving PRIs made to LLCs and the Taxation Section of the ABA has taken note of this to reason that the IRS by extension has no objection to the L3C being used for charitable purpose. The IRS received a document from the Taxation Section over a year ago that essentially included this statement and has not objected. The IRS only a few months ago issued a raft of new examples of how PRIs might be used. Many of them would fit very well in an L3C structure but again it is important to note that the IRS is structure agnostic. They only want to insure that the recipient organization uses the money for an acceptable exempt purpose and holds the investing foundation responsible for monitoring compliance. Our hope is that after some significant number of PRIs to L3Cs have been made all parties will recognize the L3C structure, because of its organization, requires that the company devote itself to fulfillment of one or more charitable purposes. In doing so it eliminates many of the questions over the structure and intention of the company while creating legal framework and fiduciary responsibility for the company to carry out the exempt purpose. The result should be a substantial reduction in transactional costs and a transparency that reduces oversight and monitoring costs. Because of it’s "branding," the designation should become well known to the public and actually reduce the possibilities of fraud or misrepresentation. Given the extensive IRS regulations and examples of use of PRIs making a PRI to an L3C should not be rocket science. It is merely a matter of coloring within the lines and the lines are well defined.
to the new Americans for Community Development
Like most movements, the L3C Movement, draws all kinds of people
and ideas. The passage of the first Low Profit Limited Liability
state legislation in Vermont in 2008 was the legal beginning, but
had years of intellectual and financial investment behind it. New
collaborators excited by the vision of for-profit businesses with
social benefit as the driving momentum, worked to pass L3C
legislation in additional states and Native American tribes. And
federal L3C legislation moves forward as well.
Americans for Community Development began as the professional
organization to promote the L3C Movement and assist the
entrepreneurs finding this new business form as an opportunity to
turn their passion to impact social change into a sustainable
As with any substantial new approach, there are the visionaries who
understand and embrace the hard work of building a business. And
there are already multiple examples of L3C s, not only in the U. S.,
but all over the world, that are already turning great ideas to
businesses worthy of investment and growth because of the way that
their founders are tackling social need.
Innovations draw naysayers as well, and the L3C Movement is not
without those. But there is opportunity in debate, sharpening
already great innovation with new ideas and approaches to social
need solutions with financial security.
We invite you to be a part of the growing L3C Movement, to share
your ideas and to join us as we work with entrepreneurs of large and
small operations, leaders who know that it takes all of us to
investing to grow the L3C.
Karen Woods, Executive Director