Tuesday, August 30, 2011

Low Profit Limited Liability Corporation ( L3C) Update

I believe Low Profit Limited Liability Corporations (L3Cs),  are key entities that will allow believers to fund  BAM initiatives in mission environments.. L3Cs are entities that may allow Corporations to Fund Entrepreneurial Projects and yet still receive Charitable Contribution tax credits.

It's  still complicated to set up, but there is legislation pending, the PRIs Promotion Act,
which is aimed at making funding of  BAM and other social enterprise start ups easier.

The following article is an update on the status of the L3C and the legislation.


by  Steve Gunderson, president and CEO of the Council on Foundations.

Earlier this year, Americans for Community Development held its inaugural conference, “L3C A to Z,” in Evanston, Ill., to educate nonprofits on Low-Profit Limited Liability Companies (L3Cs) and the advantages they provide for those pursuing program-related investments (PRIs).

At the opening plenary, I served on a panel, along with Robert Lang and Max Martin, on new philanthropic funding structures-focusing primarily on PRIs.

PRIs are an increasingly attractive tool because they allow achievement of charitable goals without depleting endowments, even producing a modest return in many cases. Such investments can provide much-needed capital to initiatives for which a foundation cares about and can often lead to innovative solutions. Examples include low-interest loans and equity investments to entities aligned with the core values of a foundation.

Another type of PRI is the L3C, a special IRS designation for for-profit companies whose primary goal is to provide a social benefit.

  • It is a cross between a charity and a for-profit company. 
  • While PRIs offer several advantages to foundations, government regulations are extremely burdensome. 
  • Under the current system, before a foundation can enter into a PRI it must make a determination that the investment is primarily intended to further a charitable purpose. This is a legal determination based on the facts and circumstances of each transaction. 
  • For old tried and true PRI models, this can be relatively simple because IRS regulation, published letter rulings, and other experience provide guidance about what is and is not allowed. 
  • Newer models for PRIs, particularly L3Cs, are not so straightforward because there are not many examples to rely on to determine when a particular investment’s structure will be considered “charitable” by the IRS. 
  • As a result, foundations may be uncomfortable with the uncertainty of a particular PRI, potentially leading to two choices: advising against the investment or recommending the foundation seek a private letter ruling from the IRS-in other words, killing the opportunity outright or delaying it so long it dies out. 
To ease the burdensome regulations and assist foundations in mission-driven investing, the Council supports legislation creating a voluntary procedure for entities seeking foundation participation in PRIs to obtain an IRS determination that such participation constitutes a permissible charitable activity.
  • The PRIs Promotion Act would restrict how much time the IRS has to respond to these requests, thus encouraging lawyers to seek IRS approval rather than advise against the investment. 
  • The legislation also would increase the efficiency of the system by allowing multiple foundations to rely on a single determination that a PRI is charitable. Currently, each foundation has to make its own determination-increasing the costs and time involved. 
The PRIs Promotion Act has yet to be introduced in Congress, but it is among priority legislation contained in the Council’s legislative agenda. To stay up to date on this and other legislative priorities relating to philanthropy, sign up for our weekly Public Policy Update and visit our Legislative Action Center.

And if you are attending the Council’s 2011 Fall Conference for Community Foundations, you have a great opportunity to learn more about L3Cs: Attend the preconference session, “The L3C-New Opportunities for Community Foundations.”

The Council has lined up a number of speakers, including Sanders Davies, senior partner, PKF O’Connor Davies; Ericka Harney, assistant director of development, The Council of State Governments; and Robert Lang (moderator), founder, Americans for Community Development. Community foundations will have the chance to learn more about using this new tool to help fulfill their mission. Steve Gunderson is president and CEO of the Council on Foundations.