Prior to 2008, the prevailing for-profit business entities required high returns on investment. Because most socially beneficial business ventures are not highly profitable, organizations pursuing these objectives are commonly set up as non-profit corporations. The problem with non-profit organizations is that they have very limited access to capital due to IRS regulations that restrict profit-seeking objectives. For social and community conscious business ventures to succeed, they need a flexible, lightly regulated business structure that allows access to investment capital. The L3C format was designed to satisfy this need.
In 2008, Vermont became the first state to enact legislation authorizing the creation of the L3C as a new business entity. Since then several states have enacted similar legislation making the L3C a viable option for socially conscious entrepreneurs. As of January 2012, the following states had enacted L3C legislation: Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming.
L3C Structure
An L3C is structurally exactly the same as an LLC. It has members, managers, an operating agreement, and flexibility with ownership rights. From a legal standpoint L3Cs differ from LLCs in one significant area: profit motive. In general, legislation authorizing the creation of low-profit limited liability companies has three requirements:
(1) that the company significantly furthers charitable or educational purposes as defined by the IRS,
(2) that no significant purpose of the company is the production of income or appreciation of property, and
(3) that no purpose of the company is to accomplish political, legislative, or lobbying activities. This structure makes the L3C a more suitable vehicle for raising capital previously inaccessible to low-profit and non-profit organizations.
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