The L3C

The concept of the L3C is fairly new—and, so far, it has both supporters and skeptics.

L3C—or low-profit limited liability—is a legal structure intended for organizations that have a socially beneficial purpose; profit, for those organizations, is a secondary goal.

Robert Lang, the head of a New York–based family foundation and CEO of L3C Advisors, developed the concept about five years ago to clear tax and regulatory hurdles. Previously, those hurdles made it difficult to form a for-profit company with a socially beneficial purpose instead of one that focuses on maximizing profit.

Built on the more common limited-liability company, or LLC, status, the L3C combines the liability protection of a corporation with the management and taxation advantages of a partnership. An L3C operates with for-profit metrics and is not tax exempt, yet it can bring together funding from foundations, trusts, endowment and pension funds, individuals, corporations, other businesses, and government entities to achieve social objectives.

L3Cs were created to comply with Internal Revenue Service (IRS) requirements for program-related investments (PRIs)—investments made by private foundations into for-profit business ventures to support charitable, educational, or religious projects or activities. However, PRIs can be potentially risky because the IRS can refuse to recognize them if it doesn’t deem a project adequately charitable.

“We call L3Cs for-profits with a nonprofit soul,” says Lang, who insists that concerns about the IRS have been overblown. “They take advantage of the fact that foundations have to give away 5 percent of their money every year. Most nonprofits are having trouble raising money. Now they can create a business, capitalize it properly with investments, and create something that is going to generate revenue.”

Sarah Duniway, an attorney at Minneapolis-based law firm Gray Plant Mooty, points out that everything that an organization wants to achieve with an L3C can be achieved with a carefully crafted LLC, with one notable exception: The L3C status immediately brands an organization as one that has a socially beneficial purpose. The status itself acts as a type of shorthand signifying a social mission, explains Duniway, who chairs Gray Plant Mooty’s nonprofit and tax-exempt organization practice team.

“I think the reason the L3C thing has caught such wildfire isn’t because it opened some fancy new legal structure that allows people to do something that’s never been done before,” she says. “It makes people say, ‘We can do all these things in the private sector?’ We in the legal sector say, ‘Yeah, you’ve been able to do those things for a long time’” using other legal structures.