L3C: The New Kid on the Block
Are you thinking of starting a business that serves a social cause and also makes a profit? Then you may want to consider structuring your business as a low-profit limited liability company (“L3C”). In 2009, the Illinois legislature amended the Limited Liability Company Act to authorize the formation of LC3s. The aim in creating this new hybrid legal entity is to allow business owners to combine the benefits of pursuing a charitable mission (similar to a nonprofit) with the advantage of earning a profit (similar to an LLC).
What are the requirements of an L3C?
An L3C is a for-profit business entity that has many similar features of a limited liability company (“LLC”) with an additional focus on charitable work. An L3C must have a primary purpose of accomplishing a charitable or educational purpose. Although an L3C is able to generate profit, it must state in its articles of organization that no significant purpose of the company is to produce income or property. Therefore, the goal of generating revenue must be secondary to the overall charitable mission of the company. Also, an L3C must state in the articles of organization that no purpose of the company is to accomplish a political goal. Finally, any company operating as an L3C must contain the term “L3C” in the title.
What are the advantages of an L3C?
One advantage of an L3C is that owners of the company are able to earn profits from their work that contributes to a social cause. This “for-profit” feature of the L3C has an advantage over its nonprofit counterparts because it is able to attract investors that are interested in contributing to a social cause and also interested in seeing a return. A second advantage of an L3C is that its primary business goal is to further the accomplishment of a charitable or educational purpose. The Illinois Limited Liability Company Act requires an L3C and its owners to maintain this business goal for as long as the business exists. This state requirement provides an L3C with an advantage over an LLC that does not have this requirement because investors can rely on the L3C to maintain their charitable goal throughout the length of the investment (see Dana Thompson, L3CS: An Innovative Choice for Urban Entrepreneurs and Urban Revitalization, American University Business Law Review 2, no.1 (2012) at 145.
What are the disadvantages of an L3C?
Although many types of investors are allowed to contribute capital to L3Cs, many private foundations have been reluctant to jump on board. Many private foundations still prefer to make donations to other nonprofit organizations rather than invest in L3CS. In many cases, private foundations do not want to run the risk that their investment in an L3C does not comply with federal tax regulations.
Despite this fact, the L3C legal entity could be a viable business entity option for entrepreneurs in the future.