L3C – Low-profit Limited Liability Company

The low-profit, limited liability company, or L3C, is sometimes referred to as a type of hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits to its members/owners.

One advantage offered by the L3C is its statutory design to match the requirements of a program related investment (PRI), an investment made by a private foundation (typically taking on the form of a loan, guarantee, or equity) with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations will generally invest in for-profit ventures (outside of a prudent invesment portfolio) only if such investments qualify as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether such investments would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to receive assurance that such investment would qualify as a PRI. L3C proponents assert that the statutory requirements of an L3C minimize this problem by making it easier for foundations to review the LLC operating agreement, which must be carefully vetted for consistency with the PRI requirements.

On April 30, 2008, Vermont became the first State to recognize the L3C as an official legal structure. Similar legislation has since been pushed in other States such as Georgia, Michigan, Montana and North Carolina. Although Vermont currently remains the only State to authorize the L3C, it has national applicability because L3Cs formed in Vermont will be recognized as a foreign LLC in any other State or Territory.

– Emily Chan

Postscript: Read the March 10, 2009 post on L3C – Developments & Resources and August 5, 2011 post on The L3C – 3 Years Later.

21 thoughts on “L3C – Low-profit Limited Liability Company

  1. Sheri

    I am interested in starting a private practice for Mental Health and Substance Abuse Counseling. Not sure if I need to form LLC or L3C.

    Thanks

    • Gene Takagi

      You may want to talk to a lawyer in your state familiar with both entities about your particular priorities and circumstances. Generally, the LLC offers more flexibility and certainty, while the L3C may generate more goodwill or make the business more attractive for certain funders (though that seems to be rarely the case).

  2. Kathryn, there are a few ways this can be done, and the exact mechanism will be determined by the applicable state law. Here are two ways this can be done:
    1. Form the L3C, then merge the LLC into the L3C
    2. Form the L3C, dissolve the LLC, and transfer the remaining assets of the LLC into the L3C
    I absolutely recommend retaining an attorney before making this critical decision. You should try to determine whether the L3C will provide you with more benefits than the costs associated with the “conversion” and the associated L3C restrictions. Would you get the same kind of benefits by keeping the LLC and getting “B corporation” status?

  3. Kathryn

    How would one convert an LLC to an L3C?

  4. Shannon, I would recommend that you confer with a Vermont attorney before setting up an L3C. You should really understand the pros and cons because there are certain limitations and restrictions with this form that may not be reversible. I suspect that the L3C is too new to be included in Small Business Administration (SBA) programs, but continue to check around, particularly with nonprofit support organizations. Good luck!

  5. Shannon

    Where in Vermont can I go to set up an L3C? Does the Vermont government offer a class on L3C organization?

  6. Mark, the L3C is not sponsored by a 501(c)(3) organization. It has its own charitable purpose.

  7. Mark Moore

    Is it required that the L3C be sponsored by a 501c3 organization ?

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  9. This is a good and informative article about the L3C which is recently launched and this kind of information is great for the law application user also in this field nuisance is more and fleece case also occurred like the case of Online Lottery so they need help like this.

  10. Sam, you may need to confer with a particular State’s Secretary of State about qualifying as a foreign L3C (or LLC).

  11. I am a social entrepreneur and I am starting this L3C in Vermont. Where can I find the info you stated about if a company starting a L3C in Vermont can be used in any State or Territory?

  12. Bo Ren

    This new legal structure gives me HOPE.

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