Low-Profit Limited Liability Company (L3C)
The first social enterprise statute passed in the United States was Vermont’s Low-Profit Limited Liability Company (“L3C”) statute in 2008. The L3C form was intended, at least in part, to attract capital from foundations by way of “program related investments” (PRIs). To maintain their tax-exempt status, foundations must spend at least 5% of their funds each year, typically in the form of grants to non-profit organizations. PRIs are transfers of money by foundations expecting a financial return, unlike a grant where no financial return is expected. PRIs can count toward that five percent distribution requirement, but the PRI must be made to further the foundation’s charitable purpose. Foundations do not make PRIs very often because they risk heavy excise taxes or even losing their tax-exempt status if they do not ensure that the PRI is used to support the foundation’s mission. By mimicking PRI regulations in the L3C statutes, the original proponents of the L3C form hoped that the Internal Revenue Service (IRS) would make L3Cs safe harbors for PRIs. The IRS, however, has failed to provide any preference to L3Cs. Due to this failure and to sharp criticism by leading practitioners and professors, L3C momentum stalled by 2012 at nine state statutes. In 2014, North Carolina even repealed its L3C statute, reducing the total back to eight states. Drawing from PRI regulations, L3C statutes have the strictest purpose requirement of the U.S. social enterprise statutes. The L3C statutes require that the company “significantly furthers the accomplishment of one or more charitable or educational purposes” and “[n]o significant purpose of the company is the production of income or the appreciation of property.” L3C statutes do not require use of a third-party standard to measure social value and do not require social reporting. Daniel Kleinberger’s and Carter Bishop’s articles cited in the references have more about the history and technicalities of the L3C, and both articles played a significant role in limiting the growth of the L3C form.
