The Low-Profit LLC (L3C): Program Related Investment by Proxy or Perversion?
26 Pages Posted: 15 Feb 2010 Last revised: 13 May 2010
Date Written: February 12, 2010
Since 2008 several states have adopted or are considering statutory amendments permitting an LLC to become an L3C when organized for a business purpose and operated to significantly further charitable purposes but without a significant purpose to produce income or asset appreciation. The L3C hybrid is designed to brand the hybrid entity as a business enterprise with a social conscience. But given that the LLC form preexisted and can be operated for any lawful purpose including low-profit, what is the advantage of the L3C statutory operating form? The L3C statutory elements can easily be incorporated in an LLC operating agreement. Closer inspection reveals that, beyond modest branding assertions, the L3C is configured to attract untapped private foundation capital. Given the risky tranche investment scheme targeted for the L3C, the private foundation must be assured its investment in the L3C will be classified as a program related investment (PRI) to avoid prohibitive excise taxes. To date that requires advance federal tax authority approval and it is unlikely the L3C statutory restrictions will serve as a proxy for federal approval. Even if so, additional excise taxes require the foundation to monitor the investment to assure it is appropriately used by the L3C. This requires approval over L3C expenditures and significant accounting reports that will be detailed in the operating agreement. Finally, it is open to question whether tranche investing will threaten the foundation’s exemption through private inurement to the other investors that results from using foundation assets without reasonable compensation.
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