When Profit Is Not the Point: The Low-profit Limited Liability Company

Social entrepreneurship news has been abuzz with the introduction of the benefit corporation in several additional states beginning this year, most notably in California and New York. The benefit corporation is structurally identical to a normal for-profit corporation, except that a benefit corporation may or must consider social benefits, such as consumer protection, local employment, or the environment, as also being in the best interest of the corporation; benefit corporations usually must also publish annual reports detailing their attempts to achieve the social benefit mission.

In several states where the benefit corporation does not yet exist, social entrepreneurs also have an option to organize a socially-minded form of business known as the low-profit limited liability company, or L3C. L3Cs are currently recognized in Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont, and Wyoming; legislation to authorize them is pending in several more states. L3C are structurally identical, are taxed just like, and operate similar to normal for-profit limited liability companies (the language authorizing them is usually baked right into a state’s LLC Act); however, the primary purpose of a L3C is to achieve a social purpose, with achieving profit only a secondary goal.

The apparent difference between L3Cs and benefit corporations is that while benefit corporations consider achieving social benefits concurrently with profit and the bottom line as being in the best interest of the company, in L3Cs the social mission and profit become primary and secondary goals, respectively. Moreover, L3Cs (along with benefit corporations) bridge the gap between traditional for-profit companies, which generally must consider the bottom line above all in the best interest of the company, and non-profit companies which are restricted in regards to the revenues they generate.

The main attraction of L3Cs is that while achieving a social benefit is the primary mission, the company can also generate profits for its equity holders. This makes the company an attractive investment for investors, particularly more socially minded ones. L3Cs are automatically classified by the IRS as program-related investments (PRI), which are investments with a socially beneficial purpose made by a private foundation that is within and furthers the foundation’s mission. Traditionally, foundations looking to invest in for-profit ventures would have to expend time and money obtaining an IRS private ruling letter or otherwise determine whether the venture met the requirements of a PRI, but since L3Cs automatically qualify as PRIs, they are more attractive investments for foundations. Therefore, organizing as a L3C can open up the potential pool of investors.

L3Cs are an option for social entrepreneurs everywhere; since they are essentially identical to LLCs, they can be domesticated in any state with no ill effects, as the laws of the state of a company’s formation control the governance of the company.