Recently, a new form of entity has been proposed in Illinois. It is called a "low-profit limited liability company” or L3C for short. In Illinois, as proposed, an L3C would be a sub-form of the limited liability company. The proposal in Illinois follows enactment of similar statutes in Vermont and Michigan and similar proposals in several other states. So what is an L3C?
An L3C is a limited liability company that cannot have as a significant purpose the production of income or appreciation of property. It must also further the accomplishment of some educational or charitable purpose. By adopting the L3C as part of the limited liability act, the Illinois proposal seeks to use the existing and established framework of limited liability companies.
Why L3Cs? L3C's are created to comply with Internal Revenue Service private foundation regulations. A private foundation must give away at least 5% of its net assets every year. A foundation's investment in a for-profit business that is considered a "Program Related Investment" (PRI) can count toward the 5%. PRIs are investments made by foundations to support their charitable activities but, unlike a strict non-profit organization, may include some return on the investment. But, according to the IRS, a PRI cannot have the production of income or the appreciation of property as a significant purpose.
Currently, whether a specific investment would qualify as a PRI is determined on a case-by-case basis, making it difficult for a foundation to know whether an investment qualifies as a PRI before making the investment. Typically, this could only be confirmed through the cumbersome and time-consuming process of obtaining a private letter ruling from the IRS. By establishing L3C's at the state level, the goal is to foster the creation of businesses for charitable and educational purposes that would satisfy IRS requirements as PRIs, without the necessity of obtaining private letter rulings. The law is written with the specific purpose of complying with IRS requirements in this regard.
A legislative bill for the creation of L3Cs has been proposed in Illinois as an amendment to the Limited Liability Company Act (Senate Bill 0239 introduced February 4, 2009.) Its key provisions include:
- Permitting the creation of low-profit limited liability companies whose name must contain the term "L3C";
- Requiring L3Cs to further the accomplishment of charitable or educational purposes within the meaning of tax laws and regulations;
- Requiring that the L3C's articles of organization state that no significant purpose of the L3C is the production of income or the appreciation of property; and
- Upon failure to satisfy any of the requirements of the L3C statute, the company ceasing to be a low-profit limited liability company.
Even if the law is enacted, the IRS must somehow "bless" the L3Cs as a vehicle for Program Related Investments. Then, of course, the foundations who are the apparent targets of the legislation, must also accept L3Cs as PRIs. It will be interesting to follow the progress of L3Cs in Illinois and other states.