Category: L3Cs

L3CS

By , February 19, 2014 10:03 am

Low-profit LLCs (often referred to as “L3Cs”) are LLCs that are formed under specific L3C provisions in LLC acts and that, under these provisions, must have, as a least one of their principal purposes, the providing of social benefits to the poor, the environment or other traditionally non-profit beneficiaries.  L3Cs are designed to attract significant investment from, simultaneously, private foundations and traditional for-profit investors.   Eight states and two Indian tribes have L3C legislation, and there are roughly 800 L3Cs actively operating in the U.S..  North Carolina used to have L3C legislation, but thought better of it and repealed it.

If you represent families that operate private foundations or even if you’re just interested in using basically for-profit legal structures to support social causes, you should know about L3Cs.  If you don’t, you can get a decent introduction from this very recent law journal article.

However, the article fails to emphasize what to me is by the most important need of any successful L3C—namely, an operating agreement that provides the members and managers with rules for addressing economic and fiduciary issues in a way that will afford maximum protection of the non-profit federal tax status of its private foundation investors.   These operating agreements are complex and difficult to draft, and after you’ve drafted them, the LLC’s members and managers must comply with them continuously and punctiliously.

Despite any implication in the above article, L3Cs aren’t a walk in the park.