November 07, 2008
In this time of financial crisis, charitable ventures may want to consider utilizing a new business structure — a Low-Profit Limited Liability Company to access additional financing opportunities. An L3C is a new type of limited liability company that is a for-profit entity formed to engage in socially beneficial activities.
Advocates of L3Cs maintain that this new kind of business will accomplish two major goals: (1) giving private foundations an opportunity to have a modest return on an investment and the ability to recoup invested funds and (2) giving companies with socially responsible goals access to new capital by expanding the list of possible investors to include private foundations, nonprofit organizations, for-profit corporations, governments and independent investors.
For example, a private foundation may be able to invest in an L3C via a special type of grant-making — program-related investments. In the past, many private foundations have avoided PRIs, given the outdated requirements in the Treasury Regulations and the need for IRS approval where the PRI deviates from those outdated models. Because L3Cs are specifically structured to meet federal requirements for a PRI, advocates hope that L3Cs will make it easier for private foundations to identify social-purpose businesses and invest in those businesses through PRIs. Additionally, advocates hope that the private foundations, given the PRI requirements, will assume the less commercially viable parts of the investments, so as to accommodate private investors who may demand higher returns and less risk.
On April 30, 2008, Vermont became the first state to enact legislation to authorize L3Cs. North Carolina has introduced such legislation; and Georgia, Montana, Oregon and Michigan are considering such legislation. Even though several states have expressed interest in L3Cs, it remains to be seen whether the IRS will consider a private foundation’s investment in these new entities to be a PRI. Future action by the IRS, such as formal recognition of L3Cs as compliant with the PRI regulations or the issuance of specific procedures for private foundations to follow when investing in L3Cs, may be necessary to make them attractive alternatives for private foundations.
If you have any questions regarding L3Cs or are interested in forming or investing in one of these entities, please contact one of the Blank Rome attorneys skilled in exempt organizations.