L3C – Low-profit Limited Liability Company

The low-profit, limited liability company, or L3C, is sometimes referred to as a type of hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits to its members/owners.

One advantage offered by the L3C is its statutory design to match the requirements of a program related investment (PRI), an investment made by a private foundation (typically taking on the form of a loan, guarantee, or equity) with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations will generally invest in for-profit ventures (outside of a prudent invesment portfolio) only if such investments qualify as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether such investments would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to receive assurance that such investment would qualify as a PRI. L3C proponents assert that the statutory requirements of an L3C minimize this problem by making it easier for foundations to review the LLC operating agreement, which must be carefully vetted for consistency with the PRI requirements.

On April 30, 2008, Vermont became the first State to recognize the L3C as an official legal structure. Similar legislation has since been pushed in other States such as Georgia, Michigan, Montana and North Carolina. Although Vermont currently remains the only State to authorize the L3C, it has national applicability because L3Cs formed in Vermont will be recognized as a foreign LLC in any other State or Territory.

– Emily Chan

Postscript: Read the March 10, 2009 post on L3C – Developments & Resources and August 5, 2011 post on The L3C – 3 Years Later.