The L3C (low-profit limited liability company), which was first enacted by Vermont (April 30, 2008), has acquired much attention and momentum in the last year. In the first months of 2009 alone, Michigan (Jan. 15, 2009), Wyoming (Feb. 4, 2009), and the Crow Indian Nation in Montana (Jan. 13, 2009) formally adopted the L3C legislation. According to L3C Advisors, the first L3C company and organized for the purpose of helping others to organize and finance L3Cs, some form of the L3C legislation is pending in Georgia, Illinois, Missouri, Montana, North Carolina, North Dakota, Oregon, Tennessee, Washington, and Utah. The Huffington Post (Feb. 9, 2009) reported that legislatures in Georgia, Montana, North Carolina and Oregon are expected to pass L3C legislation this year. Below is a summary of the recent developments surrounding the L3C:

Proposed State Legislation. As summarized in the National Council of Nonprofits’ Nonprofit Policy News (Feb. 2009), the respective proposed legislation may vary slightly among states. For example, both Illinois and Utah’s proposed legislation would amend the Illinois Limited Liabilities Company Act and Utah Revised Limited Liability Company Act respectively to allow for the creation of L3Cs as hybrids of standard nonprofit and for profit entities. North Dakota’s proposed legislation, on the other hand, amends the North Dakota Century Code (relating to limited liability companies) to allow for the creation of “Nonprofit Limited Liability Companies.”

Federal Legislation Movement. Although a private letter ruling or federal legislation is not required to operate an L3C in any state, the L3C movement is also operating on a federal level. The Council of Michigan Foundations (CMF) reported (Feb. 6, 2009) that Robert M. Lang, Jr., president and CEO of the Connecticut-based Mary Elizabeth & Gordon Mannweiler Foundation, L3C Advisors CEO and the creator of the L3C model, Robert Collier, CMF president and CEO, and Steve Gunderson, president and CEO of the Council on Foundations, are currently working with congressional leaders to introduce a federal L3C bill. L3C Advisors, seeing the potential benefit to enhance the L3C’s value, ease of use, and flexibility introduced The Program-Related Promotion Act of 2008and discussed it with Senate Finance Committee staff (Dec. 18, 2008) and the Joint Committee on Taxation staff (Jan. 15, 2009). According to L3C Advisors, the proposed legislation is intended to “facilitate PRIs by private foundations, in part by amending section 4944(c) of the Code to provide a process by which an entity seeking to receive PRIs can receive a determination that below-market foundation investments in such entity will qualify as PRIs.” The Council on Foundations supports the federal legislation movement to allow private foundations to make PRIs to L3Cs, as stated in their 2008 Agenda for Philanthropic Partnership and 2009 Issue Paper.

A New Solution to New Problems. The L3C is becoming increasing viewed as a new solution to various problems that have negatively affected an industry or a state’s economy. Examples include:

North Carolina's Hard-hit Furniture Manufacturing Industry: As the Community Wealth Vanguard, Inc. reported in its newsletter, Lang’s L3C initiative in North Carolina is largely in response to the furniture manufacturing industry suffering from increased global competition. Lang envisions L3Cs owned by his and other foundations, individuals, and institutional investors that “will buy factories in the state, make them green and up-to-date, and lease them to furniture manufacturers at a low rate, thereby helping the manufacturers to be more competitive and preserve jobs.” Lang hopes to make the L3C a viable investment product that allows the benefits of tiered investment with foundations holding the greatest financial risk in the top tier, banks, wealthy community-minded individuals, or institutions in the middle, and a AAA investment that could be sold to pension or endowment funds at the bottom.

Decreasing Valuations of Biotech Startups: Chris Larson of the San Diego Section of American Chemical Society reported (Oct. 15, 2008) stated that the funding highs of the late nineties are a trend of the past and current valuations of biotech startups are substantially lower. Some biotech companies are suffering from venture capitalists’ “need for speed” – measuring portfolios’ performances by the money generated from an investment relative to the time it takes for the gain to be realized – which has caused a recent trend towards investment in late-stage NRDOs – no research development only organizations. Consequently, discovery-stage biopharma companies and small-market or low-margin biotechs have become less attractive investment opportunities. Larson believes the L3C “could be a win-win for both sides of the biotech entrepreneurial struggle, as investor/donors would then have the possibility of sustainability and return through ownership versus pure charity, and scientists and other start-up founders could then have access to a fresh new pool of money willing to invest in deals of a scale, and with a time horizon and expected rate of return, that traditional investors of the last several years have forgone.”

The Struggling Newspaper Industry: Sally Durosreported in the Huffington Post (Feb. 9, and Feb 26, 2009), newspapers are dealing with a current lack of capital caused by investors turning “news-gathering into Wall Street product.” While certain papers still make money, "The problem is it cannot make enough profit for all the games normal for-profits get involved in." (Lang commenting on the Peoria Newspaper Guild). Historically, newspapers are not considered nonprofits. However, the Program-Related Investment Promotion Act, if passed, would expand charitable purposes to include newspapers. In Illinois alone, under the 5% payout required by foundations, Illinois foundations invest $17M each year in programs serving a social purpose out of their $535 combined assets. The L3C scenario would thus provide an opportunity for newspapers to make “enough” money. Lang stated, "What we are looking at is the newspaper as a self-sufficient entity. It will not be a high profit entity." Unlike other current options, the L3C is sustainable, allowing newspapers to tap into the $17M available for PRIs while the L3C’s social purpose business model continues to realign newspapers with their community service mission. The Communications Workers of America and other reporters have raised similar discussions for other struggling newspapers, for example, in Seattle and Minnesota.

Generating Greater State Tax Revenue: Tom Jacobson, Executive Director of Rural Dynamics, Inc., emphasizes there are potentially vast benefits possible with the L3C structure.  In the Rural Dynamics’ “L3C Information” article (Jan. 14, 2009), he highlights that “[b]eing an early adopter of this legislation allows for greater investment in Montana which not only directly benefits our communities through more capital being invested from large foundations and corporations into our local non-profits but can also be a tax revenue generator for Montana.” Marc J. Lane similarly spoke out in the 2008 Lane Reports about Illinois’ $420 million budget deficit, stating, “L3C's investors can offer low-interest loans to needy students, finance low-income housing projects, provide credit to disadvantaged business owners, combat community deterioration, and help alleviate other social strains.” Although once established, an L3C can operate in any state, Lane encourages that “Illinois should champion innovation, social entrepreneurship and self-reliance, and empower those who would drive the social progress we demand.”

Established L3Cs. According to the CMF, roughly 35 L3C entities have been or are in the process of being created in Vermont, such as CoolPass, L3C, Faithful Travelers, L3C, and Monkton Community Coffeehouse, L3C. A list of established L3Cs in Vermont is searchable through the corporation database on the Vermont Secretary of State website.

Legislative Update – May 5, 2009

Arkansas - Representative Kathy Webb sponsored HB 2102, an act to allow the creation of the low-profit limited liability company, in the Arkansas state legislature on March 9, 2009. It is currently placed on the House calendar.

Illinois – The Senate unanimously passed SB 0239, an act to allow the creation of the low-profit limited liability company, on April 2, 2009. It will be reviewed next by the House for approval.

North Dakota- The bill HB 1545, to provide for a legislative council study regarding the L3C, passed the House of Representatives on February 12, 2009 and the Senate on March 17, 2009. It was signed into law on April 8, 2009 by Governor John Hoeven.

Maine - Representative Elsie Flemings introduced LD 1265, "An Act Regarding Low-profit Limited Liability Companies," in the Maine legislature on March 31, 2009. The Maine Legislature's Judiciary Committee held a work session on LD 1265 on April 27, 2009.

Utah – Governor Jon M. Huntsman Jr. signed the Low-profit Limited Liability Company Act SB 0148 into law on March 23, 2009.

For a brief overview of the L3C structure, please view a previous post, “L3C – Low-profit Limited Liability Company.” Please also view the Community Wealth Ventures, Inc. Research Brief July 2008and the Mannweiler Foundation Inc. article, “The L3C: the for profit with the nonprofit soul.”

A continuously updated resource page on L3Cs is available at the Americans for Community Development website.

For more information on the January 2009 developments in Michigan, Wyoming, and the Crow Indian Nation, please view the articles by the Council of Michigan Foundations discussing the legislation, and Rural Dynamics discussing the Crow Indian Nation legislation, as well as the Wyoming L3C legislation.

The proposed legislation is available for viewing for Illinois, Missouri, North Carolina, North Dakota, and Utah.

Summaries on some of the proposed legislation is available by the North Carolina Center for Nonprofits and Rural Dynamics (Montana L3C initiative).

For more information regarding PRIs, please view Jane Searing’s “Capital with a Conscience” article in the Journal of Accountancy.

For more information on the L3C newspaper structure, please view Sally Duros’ article on her independent homepage.

- Emily Chan

Postscript: Please read the August 5, 2011 post on The L3C – 3 Years Later.

Comments

  1. Excellent, thorough roundup of L3C info! Thank you!

  2. Sally Duros says:

    Ditto. Thanks you very much. I’ll refer to your summary soon on my blog.

  3. Gene Takagi says:

    Thanks, Elizabeth and Sally. Emily did a great job on the post. More to follow soon.

  4. Sarah says:

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
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  5. Sarah says:

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
    Sarah
    http://www.craigslisttool.info

  6. Tony Wang says:

    Thanks for the roundup – my former thesis advisor just asked me for literature on the L3C and this was a great resource. Would love to talk to both of you more offline about these new developments.

  7. Gene Takagi says:

    Anytime, Tony. I’m certainly a big fan of Blueprint Research & Design and Lucy. Nice to learn of your blog as well: Philosopher 2.0.

  8. Chris Rabb says:

    It would seem that the proposed Program-Related Investment Promotion Act of 2008 would obviate the need for Sen. Cardin’s bill, S. 673 that would create a new tax-exempt entity known as the Qualified Newspaper Corporation.
    Read the text of S. 673 here:
    http://www.opencongress.org/bill/111-s673/text

  9. Gene Takagi says:

    Chris, the PRI Promotion Act does not include the key unrelated business income tax provisions of the Cardin bill (that newspapers may find critical). http://classic.cof.org/files/Documents/Conferences/LegislativeandRegulatory06.pdf.

  10. Rick Zwetsch says:

    RE: North Dakota- The L3C bill HB 1545 passed the House of Representatives on February 12, 2009 and the Senate on March 17, 2009. It was signed into law on April 8, 2009 by Governor John Hoeven.
    George…I cannot find evidence that L3C legislation has actually passed and been enacted in North Dakota. Can you help with that?

  11. Robin says:

    What percentage of Non-profit proceeds may be kept in-house for overhead and salaries?

  12. Jeff Mowatt says:

    Something we’ve been doing along identical lines, as I relate in my own blog about profit-for-purpose business models.
    http://www.ecademy.com/node.php?id=134346

  13. Gene Takagi says:

    The front page of the November 12, 2009 issue of The Chronicle of Philanthropy covers the L3C. Here is a telling quote from the issue:
    “We have not been able to benefit from the L3C portion of our organization,” says Loretta Maase, the [Texas-ParentRise] chief executive officer. “Foundations in Texas are still unaware of this, and there needs to be a public-awareness effort to get foundations to even consider listening.”
    She adds: “Foundations don’t understand how the whole thing works, and they are not likely to explore it on their own right now until there is an incentive for them to do so.”

  14. law firm says:

    Elizabeth and Sally you both did great job of posting this article about l3c.

  15. Bennie says:

    Something we’ve been doing along identical lines, as I relate in my own blog about profit-for-purpose business models.
    Tax Attorney Attorney Temecula