Below are valuable resources to give you some excellent background on many of the important aspects of the L3C. What it is, what it isn't, how it works, the flexibility, the power, some initial case studies, and tons of ideas to help you think about how an L3C might work for you!
Please look through these resources and don't hesitate to contact us if you have questions or want to brainstorm how an L3C might work for you and your enterprise.
And remember, just like us...if you're interested in or excited about the L3C you are AHEAD of the curve!
We have a lot of educating to do but we we believe the opportunities are truly limitless.
Once you get through this information, we think you'll agree!
Caryn Capriccioso, MNM Principal Partner
303.774.9746
caryn at interSectorL3C dot com
Rick Zwetsch Principal Partner
303.774.9745
rickz at interSectorL3C dot com
Recent Legislation in Several States May Offer Opportunities for Investors to Partner with Tax-Exempt Private Foundations
Introduction
Several states recently have created a new type of investment entity—a Low-Profit Limited Liability Company (or “L3C”)—that may open the door to co-investments by tax-exempt private foundations (“Foundations”) and for-profit investors. The L3C, first authorized by Vermont in April 2008 and now authorized by five states (as of March 2010), is a for-profit entity designed to be an acceptable investment under the US federal tax rules for a Foundation. This new business entity may provide alternative means for Foundations to invest their capital, encourage new capital investments from existing Foundations and present opportunities for investors to partner with Foundations in socially beneficial ventures.
Philanthropic Facilitation Act of 2010
The current economic recession has resulted in the coincidence of fewer philanthropic dollars with greater philanthropic need. Accordingly, private foundations are looking for a way to generate a return, however modest, on their funds available for distribution.1 The exception for program-related investments (PRIs) under Section 4944 of the Internal Revenue Code of 1986, as amended (the "Code"), allows a non-profit to make a return on an investment which also qualifies as a qualifying distribution under Section 4942 of the Code. The Philanthropic Facilitation Act of 2010 would improve the ability of private foundations to use the PRI exception more efficiently and thereby would open up additional capital for investment in economically-distressed industries.2
Harnessing the potential of a new hybrid business model to create long lasting change.
This week on Planet Good Radio we’ll discuss the details of a new hybrid legal structure that combines the financial advantages of the limited liability company, an LLC, with the social advantages of a non-profit organization.
Here is a a good basic overview of the L3C. It's very important to remember that the L3C is NOT a nonprofit. It is a low-profit limited liability company that puts social mission or social purpose before profit. The L3C is also NOT a corporation. It is a hybrid limited liability company that once again, puts social purpose/mission ahead of profit.
This is a more in-depth discussion of the L3C provided by Bob Lang, the creator of the L3C concept. Bob covers Program Related Investment (PRI), the L3C and the LLC, the LLC and socially responsible investing, financing and governance.Make sure you have a highlighter and notepad ready when you go through this overview!
Filing your Articles of Organization and corresponding Statement(s) of Foreign Entity Authority are the easiest parts of forming a new L3C.
The more important, potentially more time consuming and critical part of forming an L3C is thinking through and completing your L3C Operating Agreement. This is the bible, this is the document that will guide you in everything you do as an L3C. Please make sure to check your state's LLC legislation for guidance as to what can, cannot and must be in your L3C Operating Agreement as well as filing requirements.
Because an L3C is a for-profit enterprise with a primary goal of performing a socially beneficial purpose ahead of earning a profit, the L3C is the perfect engine for low cost, highly effective, socially beneficial directed economic development.
The L3C can help without government investment. An L3C might be organized to build or run a charter school. An L3C could be considered as an eligible Community Reinvestment Act investment vehicle.It's also the perfect vehicle to incubate new or struggling industries (how about newspapers?) to provide employment help where unemployment is ravaging our cities and towns.
How can a L3C do all this? Please read on...
Community Foundations & The L3C
Community foundations have the potential to play some very important and unique roles in the use of the L3C. The L3C is a hybrid vehicle designed to bring various types of individuals and entities under the same umbrella. Some may be investors and some may not.The L3C provides for different investors to make different types of investments, utilizing different terms and ultimately receiving different types of returns.
Because an L3C is NOT a nonprofit or tax exempt organization, donors and contributors to and investors in a L3C do not receive a tax deduction or tax advantage by making that donation or contribution to or investment in the L3C.
However, if the donation or contribution were made to a community foundation that in turn made a Program Related Investment (PRI) in the L3C, the donor or contributor could preserve their tax deduction, and in conjunction with the community foundation, direct their dollars as PRI to the L3C.
The low-profit limited liability company (L3C) format was created to bridge the gap between the underutilized capacities of non-profit organizations and for-profit entities. The L3C was first introduced in the United States in 2008 when Vermont adopted the L3C as an official legal structure.2 The Vermont statute has national applicability because a L3C formed in Vermont can do business in other U.S. jurisdictions.
The L3C format is currently authorized in six other jurisdictions,3 and bills have been introduced in a number of other states to legitimize the L3C format.4 The L3C itself cannot qualify as a tax-exempt organization under §501(c) of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), or under any state law provisions, because more than an insignificant part of its activities is the business of making a profit. At its core, the L3C is a profit generating entity with a social mission as its primary objective.
The social sector is facing enormous challenges. Government support has dried up as staggering budgetary shortfalls divert federal and state resources toward basic services. The recession has taken its toll on philanthropy while philanthropic need is greater than it has been at any time since the Great Depression: The Chronicle of Philanthropy recently reported that charitable giving is down nine per cent this year. And the stock market’s plunge has devastated endowments and the grants they fund.
Since the time of the English Common Law, trustees, executors and other fiduciaries holding or managing money or property for the benefit of third persons have been subject to personal liability if they made truly bad investments with those assets. In 1969, this concept found its way into the Internal Revenue Code's then new "private foundation rules".
Sections 4944(a) and (b) of the Internal Revenue Code (the "Code") impose excise taxes on investments that jeopardize the carrying out of the exempt purposes of a private foundation. Such taxes may be imposed by the Internal Revenue Service (the "Service") on the errant foundation, its managers, or both. Additional taxes may be imposed if the improper investment is not remedied within the prescribed time.
Jeopardizing investments generally are those that show a lack of reasonable business care and prudence in providing for the long- and short-term needs of a foundation for it to carry out its exempt function. We need not look to the Code or Common Law for examples of bad investments. Common sense tells us that an unsecured, long term, low interest rate loan to a financially struggling non-profit organization is usually not a good business investment -- although it may be very good programmatically.
by Rick Zwetsch, Principal Partner, interSector Partners, L3C Posted 8/14/2009 on www.socialearth.com
There’s been a fair amount written about the L3C recently. We’re seeing the gamut from people over-the-top excited about the possibilities of this innovative, hybrid business model to pundits dismissing the L3C as a mediocre solution to anything at best.
Some of what we hear and read is true, some partially true and some not true at all. Generally, we are seeing social entrepreneurs trying to harness the excitement while academics research and analyze. Not entirely unexpected!
Robert Lang, the man who led creation of the new, low profit limited liability company--or "for profit with a nonprofit soul"--was in Detroit recently to talk about the various L3C efforts taking shape around the country.
“The nonprofit model is in very bad shape,” said Lang, CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation in Cross River, N.Y.
Nonprofits “can’t go on begging people for money for all (their) activities.”
Chicago's newspapers could find a lifeline to solvency and a return to social purpose in a new kind of business structure called an L3C, or low-profit limited liability company.
interSector Partners, L3C has worked diligently to ensure that all information at this Web site is accurate as of the time of publication and consistent with standards of good practice in the general management community. As research and practice advance, however, standards may change. For this reason it is recommended that readers evaluate the applicability of any recommendations on this page or at this Web site in the light of their particular situations and the potential for changing standards.
This Web site addresses legal, accounting and financial matters, but does not in any way provide or constitute legal, accounting or financial advice or opinion. Many of the topics on this page and at this Web site are related to and are potentially significant to tax exempt organizations and associations, and failure to act consistently with Internal Revenue Service rulings or guidance or other applicable law could result in taxability of revenues, loss of tax exempt status, or other potential unforeseen liability. It is strongly recommended that all readers consult their individual professional legal, accounting and financial advisors and take action only upon receipt of such advice.
