At the Council on Foundation Conference, former director of the Exempt Organizations division of the IRS Marcus Owens discussed the concept of a new form of legal entity that might be an appropriate vehicle (1) for social enterprises, and (2) to receive program-related investments – the low-profit limited liability company or L3C.  The L3C would be a type of limited liability company created under state law to generate modest profit while carrying on a business that has a charitable purpose.

The Council on Foundations supports federal legislation that would allow foundations to make program-related investments to L3Cs.  In its 2007 (Legislative) Agenda for Philanthropic Partnership, the Council describes its position as follows:

Rationale:  The L3C is designed to facilitate the flow of philanthropic capital to economic development activities such as creating jobs in economically depressed areas. It does this by simplifying the complex analysis required before private foundations can undertake program-related investments. The proposed legislation would benefit community foundations and other public charities engaged in economic development by allowing them to contribute to a business that is structured primarily to accomplish a charitable purpose.

The L3C would be limited to business activities that significantly further a charitable or educational purpose and that do not have a significant goal of producing income or capital appreciation. Therefore, foundations should be able to invest in or make grants and loans to L3C’s and have the payment count towards the foundation’s payout. Further, they should be able to do so without the need for the analysis that currently supports program-related investment decisions.

Current Legislation:  State legislation to create the L3C has been introduced in North Carolina. The bill language [drafted by Owens] closely tracks the requirements for a private foundation to make a program-related investment. The IRS could recognize L3C’s through the regulatory process. However, due to the novelty of the concept, the IRS is unlikely to do so without congressional approval in the form of legislative recognition of the L3C. Working with outside counsel, the Council is determining which elements to recommend including in federal legislation to ensure that the L3C provides the intended benefits without creating a significant new opportunity for abuse

Here is how the North Carolina bill (Senate Bill 91) defines an L3C:

An entity formed and existing under this Chapter that is organized for a business purpose that satisfies and is at all times operated to satisfy each of the following requirements:

a.  The entity (i) significantly furthers the accomplishment of one or more charitable or educational purposes within the meaning of section 170(c)(2)(B) of the Internal Revenue Code of 1986, as amended, and (ii) would not have been formed but for the entity’s relationship to the accomplishment of charitable or educational purposes;

b.  No significant purpose of the entity is the production of income or the appreciation of property; provided, however, that the fact that an entity produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property; and

c.  No purpose of the entity is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the Code, as amended.

You can read more about L3Cs at the following sites:

Charitable Returns – Worth

"Mixing Mission and Business:  Does Social Enterprise Need a New Legal Approach?" – Highlights from an Aspen Institute Roundtable – Nonprofit Sector Research Fund

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