Low-Profit Limited Liability Company
Sometimes people want to form a business that not only generates profits for its owners, but also benefits society. In response, states have authorized low-profit limited liability companies (L3Cs) which combine social benefits of a nonprofit entity with the financial benefits of a traditional for-profit entity.
L3Cs are for-profit companies that satisfy three requirements:
- L3Cs significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of Sec. 170(c)(2)(b) of the Internal Revenue Code, and the company would not have been formed but for the company's relationship to the accomplishment of those charitable or educational purposes.
- Production of income or appreciation of property is not a significant purpose of the company.
- The company does not intend to accomplish one or more political or legislative goals.
These three requirements allow the L3C to conform with the IRS’s conditions on a charitable foundations ability to make a program-related investment (PRI) which is one of the ways a tax-exempt foundation is able to meet the IRS’s requirements that it pay 5% of its funds towards a charitable project or activity each year.
How are L3Cs Formed?
Just like traditional LLCs, L3Cs are formed by filing the Articles of Organization with the Secretary of State. As L3Cs are subject to the same provisions as traditional LLCs, the company will also need a registered agent and an operating agreement. It will also be required to pay any annual fees and file annual reports if traditional LLCs are required to do so. L3Cs must also include either “L3C” or “Low-Profit Limited Liability Company” in the Articles of Organization, as well.
How is an LLC Managed?
Similar to traditional LLCs, L3Cs can be member-managed or manager-managed. Details on how the L3C will be managed is set out in the operating agreement. The operating agreement will discuss whether meetings are required, how both ordinary and irregular decisions are to be made, and the duties, obligations, and liabilities of members and managers. For L3Cs specifically, the operating agreement will also need to include the imposition of the fiduciary duty ensuring that the L3C meets its statutory obligations to retain the L3C status.
How is an L3C Taxed?
L3Cs are not tax-exempt as they are for-profit entities. L3Cs are taxed exactly the same as traditional LLCs. Therefore, an L3C with two or more members is taxed as a partnership, whereas, an L3C with one member is, by default, disregarded, and all income, credits, and deductions are reported on the member’s individual tax return. However, an L3C may elect to be taxed as a corporation instead.
How are L3Cs Funded?
L3Cs are designed to receive the majority of its funding via PRI investments. However, as a for-profit entity, L3Cs can also obtain funding from investors, banks, and pension funds.
L3Cs are great for socially motivated entrepreneurs, but they are not right for everyone. If you’re interested in setting up a L3C, you may want to speak with a business planning attorney first.