Several states, including North Carolina, and Indian tribal governments are early adopters in establishing the low profit limited liability company. Known by its initials, an “L3C” is a hybrid organization considered a for-profit, taxable entity which combines business with charitable or educational purposes in a single organization. Built on the framework of a traditional limited liability company (“LLC”), the L3C offers the potential for a corporation’s liability protections combined with an LLC’s flexibility. But an L3C’s primary purpose is to attract foundation program related investments (“PRI”) as an alternative source of capital for the social entrepreneur.
Unlike the traditional LLC, embedded in the L3C’s legal structure are three key constraints designed to address IRS requirements for a PRI. An L3C must: 1) advance the foundation’s exempt purposes; 2) address the L3C’s income and capital appreciation; and 3) limit legislative and political activity. While the L3C may offer an additional source of capital, a social entrepreneur remains free to seek capital from other traditional sources. For a foundation the L3C provides an alternative vehicle to advance its exempt purposes and meet its annual distribution requirements. At a minimum an L3C offers the potential to create a market brand identity as a social enterprise.
As a new organizational form, L3Cs may offer significant potential, but not without risk. Structuring its ownership, management, and governance will be key considerations, especially when operated in connection with a tax exempt entity. Whether the L3C form will gain traction in the market place remains to be determined.