A particularly well written analysis posted on LinkedIn by Robert Lang, creator of the L3C. -Richard
We’ve had various questions in recent days about the L3C and thought this particular information might be useful.
All states have no choice but to recognize L3Cs from another state as they are a variant form of LLC and every state must honor every other state’s LLCs just as you can use a Delaware corporation in Idaho. In so far as revenue rulings go, the ones on LLCs would apply. It may elect pass through status just like any other LLC and would most likely do so. The IRS does recognize L3Cs but it is not going to give them the “Good Housekeeping” seal because it is not concerned with the generic group. Its interests relate to whether any particular L3C meets the conditions for investment by a particular foundation as a PRI. This is foundation specific. What is an acceptable PRI for one foundation may not be acceptable for another. The foundation must still use due diligence and work with its attorney both to choose the investment and negotiate the operating agreement to be sure if fulfills the foundation’s needs.
An L3C can get a grant from a foundation or the foundation can make a PRI investment. There are also ways for individuals and corporations to make a tax deductible contribution that ends up in the L3C. The L3C has the advantages of the flexibility of organization under the LLC laws. If properly put together the L3C integrates mission and income and eliminates UBIT issues and the regulations regarding percentage of control that a foundation may have in a for profit. Since a PRI into an L3C can replace a grant it also does not fall under the jeopardy investment regulations.
The L3C as an LLC allows the members of the L3C to make investments, have responsibilities, receive income, and have voting power in disproportionate relationships to one another. The LLC is effectively a partnership with corporate protection. That means that the operating agreement or contract among the members, can within the framework of the law, essentially embody whatever the members agree upon. This makes the L3C very well suited to membership by a disparate group of organizations.The membership could include corporations, nonprofits, government organizations and individuals. The nonprofit, could be given total day to day control and never invest a dime.
Finally the L3C designation as a brand will come to be recognized by the world at large for what it is. The transparency and efficiency will elevate L3C organizations from obscurity to high public awareness. Once that is achieved it will be far easier to get public investment in the L3C which is the eventual goal. We need to greatly reduce the burden on the very limited resources of the nonprofit community and allow businesses to perform many of the services in our society which can be performed under a for profit umbrella. For profits make a positive financial contribution to the community. An L3C will not be exempt from property tax so its existence makes positive contributions to the community without making a hit on the public treasury.
Written by Robert M. Lang
CEO, L3C Advisors, L3C