A Myth Deconstructed: The 'Emperor's New Clothes' on the Low-Profit Limited Liability Company
32 Pages Posted: 18 Jan 2011
Date Written: 2010
In 2008, Vermont enacted the first "low-profit limited liability company" statute, and since then seven other states have followed. L3C proponents tout the device as: (i) a break-through in charitable giving, enabling "socially beneficial enterprises" to leverage foundation money to attract market-rate investors through "tranched investing;" (ii) a simple, wise, and useful development in the law of limited liability companies; and (iii) a method destined to be fast-tracked for special treatment under the provisions of the Internal Revenue Code ("Code" or "IRC") dealing with "Program-Related Investments" ("PRI") by charitable foundations.
Unfortunately, these glowing characterizations are each flatly wrong. The L3C is an unnecessary and unwise contrivance, and its very existence is inherently misleading. The notion that an L3C should have privileged status under the Code is inescapably at odds with the key policies that underpin the relevant Code sections. The L3C is not on track (let alone a fast track) to any special status under the Code. Moreover, due to technical flaws, the L3C legislation adopted to date is nonsensical and useless.
This article carefully debunks each major tenet of the L3C "movement" and reveals the legal and practical realities under "The Emperor’s New Clothes." Using foundation funds to offer market-rate returns to "tranched" investors is, at best, a complicated device; not appropriate for "branding" and simplistic appeals to social conscience. When a foundation contemplates making a program-related investment, the matter requires careful, individualized, professional assessment, not reliance on a branded template. In this context, the L3C is but a snare and a delusion.
Keywords: Delaware, Journal, Corporate, Law, low-profit limited liability company, L3C, Internal Revenue Code
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