In our continuing effort to keep you up to date on the latest in business law, today we bring you another installment in our series on cutting-edge business entities. This time: the low-profit limited liability company, or L3C. You can find our previous blog post on Series LLCs here.
Low-profit in this context doesn’t mean that the company simply isn’t doing well financially. Rather, the company is called “low-profit” because it is specifically established to accomplish one or more charitable purposes and does not have as a significant purpose the production of income or the appreciation of property.
Currently, L3C statutes have been passed in nine states and two Native American tribal areas with the intention of bridging the gap between traditional for-profit business entities and not-for-profits. The idea of the new entity centers on a particular kind of investment made by private foundations called “program-related investments”.
Private foundations generally are required to distribute 5% of their assets per year for charitable purposes. Typically, this is done in the form of grants, but foundations can also make program-related investments, as long as such investments don’t have a significant purpose in the production of income or the appreciation of property. You might notice that this language dovetails nicely with the requirement noted above under state statutes to qualify as an L3C. This is because L3Cs are intended to be easy ways for private foundations to make program-related investments and satisfy the 5% distribution requirement.
It is possible that private foundations could partner with other investors in L3Cs and use the financial concept of “tranches” to give market rate returns to some investors and lower returns to the foundations, staying within the bounds of IRS rules and regulations. It is unclear whether this concept will work in practice.
These entities truly represent the latest in business entity law. They are untested and present a multitude of unanswered questions. Currently, neither Missouri nor Kansas has passed legislation concerning L3Cs, although a bill has previously been introduced in Missouri. We’ll be sure to keep you appraised as this interesting new concept is further explored.
If you’re wondering which LLC is best for your business, contact our office at 816-561-5000 or send us a message through the form below.
*This post was originally published on April 9, 2013
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