| The hot topic in foundation circles today is the L3C, | | | | profit company." The chief goal of the L3C is to |
| otherwise known as the low profit limited Liability | | | | increase the flow of both private and philanthropic |
| Corporation. Experts tout it as the latest development | | | | capital to ventures that further a charitable or |
| in social enterprise. Several states are now legalizing | | | | educational purpose of some nature. The L3C hopes |
| L3Cs and the tax and philanthropic benefits that | | | | to accomplish this goal by wiping away some of the |
| accompany them. You may have read the recent | | | | legal challenges associated with PRIs. |
| news concerning the Bill and Melinda Gates Foundation | | | | The L3C combines the unique features of an LLC with |
| and its focus on "creative capitalism." There has been | | | | the "soul" of a nonprofit. L3Cs are profit-making |
| increased emphasis on social enterprise organizations, | | | | corporations, but their owners don't identify profit as |
| and its supporters are currently pitching their use for | | | | their primary purpose. The mission of an L3C is a |
| federal approval. | | | | social benefit, doing socially productive and useful |
| L3Cs are part of a movement to expand the scope | | | | things, and only then earning a profit. By creating a |
| of charity, including foundation grants and individual | | | | vehicle that by law that complies with the requirements |
| donations beyond the 501(c) (3) public charity model. | | | | for a PRI, the L3C holds the potential of enhancing |
| L3Cs open up private foundation money to the social | | | | social enterprise sector activity and even helping 501 |
| enterprise sector; but only a very special kind of | | | | (C) (3)s that may choose to start a social purpose |
| private foundation money known as PRIs (or Program | | | | business. |
| Related Investments). PRI investments can come to a | | | | Other Benefits of LLCs |
| L3C in the form of a loan or equity an investment. | | | | Since an L3C fundamentally is an LLC, it is absent a |
| Now, you might ask; what does the word investment | | | | special election to be treated as a corporation for tax |
| have to do with non-profits organizations like you | | | | purposes. The income from an L3C will be treated as |
| involved in Social Enterprise? Think of it as high | | | | a "pass-through" or "flow-through" entity for federal |
| engagement grant making activity. In the same way a | | | | (and generally state) income tax purposes. It provides |
| venture capital company invests in a for-profit | | | | its members with liability protection against the actions |
| enterprise in order to generate a return on investment. | | | | and debts of the L3C. It also provides great flexibility |
| A foundation looks at its PRI investment money to | | | | with no limitations as to who may be a member and |
| further the "effectiveness" of its charitable dollars | | | | there are few restrictions imposed on its management. |
| beyond making just an outright grant, which is the | | | | What L3Cs Are Not |
| traditional means by which that you and I are most | | | | As important as what L3Cs are, is what they are not, |
| familiar with. One of the unique aspects of PRI money | | | | a L3C is not an IRC Section 501(c) (3) organization and |
| is that it comes back to the foundation grows and then | | | | is not tax-exempt. It is not eligible to receive tax |
| is later "reinvested" for other PRI activities. | | | | deductible charitable contributions under IRC Section |
| Furthermore, the amount of PRI investment counts | | | | 170. That said, PRIs are hybrids between grants and |
| toward the mandatory 5% that foundations are | | | | investments. Unlike grants, PRIs can be repaid and can |
| required to give out in order to maintain its legal status | | | | produce a modest return on the investment. A classic |
| as a private foundation. | | | | example of a PRI is a no interest or low interest loan |
| Fundamentally, an L3C is a limited liability company | | | | to economically disadvantaged businesses that are |
| ("LLC"), which is a type of for-profit legal entity that | | | | unable to obtain conventional financing. |
| has existed throughout the World for over 1,000 years. | | | | So why do Foundations Make PRI investments? |
| LLCs are widely accepted and used, and are treated | | | | Some private foundations feel PRIs-which are not |
| as partnerships for income tax purposes. Since, L3Cs | | | | outright grants but generally are required to be |
| are recognized as partnerships for income tax | | | | repaid-may be more effective in motivating an |
| purposes, they file IRS Form 1065. | | | | organization to accomplish its mission in an |
| L3Cs are perfect for social entrepreneurs because | | | | economically efficient manner. Private foundations may |
| they expand the scope of charitable thinking in a way | | | | make PRIs without violating the special excise tax |
| that sort of convenes a charitable status to "for-profit" | | | | rules applicable to private foundations. Furthermore, |
| corporations as well as nonprofit charities. A L3C can | | | | PRIs have certain advantages over other investments |
| also be considered to what is referred to as a "low | | | | under the private foundation excise tax rules. |