Social Enterprise – A quick look at the L3C

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.

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About Marty Martin, JD MPA

Marty Martin, JD MPA, Martin Law Firm, Raleigh, North Carolina, provides legal, tax, and training services related to nonprofit, tax-exempt, and social enterprise organizations serving local, regional, state, national, and international constituencies. He works with them throughout their lifecycle including start up, operations and management, board governance, merger, and closing down. He is an instructor with the Duke Nonprofit Management, Intensive, and Advanced Certificate in Nonprofit Leadership programs. He is a BoardSource Certified Governance Trainer. Martin is affiliated with North Carolina State University's Institute for Nonprofits. Martin served for three years on the IRS Advisory Committee for Tax Exempt and Government Entities ("ACT"). He was awarded the IRS TEGE Commissioner's Award which "is the highest honor of the Tax Exempt and Government Entities Division, and the highest honor we can personally bestow" for his service. He received a Master in Public Administration (MPA) degree with a concentration in managing nonprofit and public sector organizations from the Harvard Kennedy School and Juris Doctorate (JD) degree from Western New England University School of Law. He completed advanced training in nonprofit organizations from: Harvard Business School's Initiative on Social Enterprise; Harvard Kennedy School's Hauser Center for Nonprofit Organizations; Duke University's Nonprofit Management Program; University of California Berkeley Haas School of Business; Center for Creative Leadership; BoardSource; and the TCC Group.
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