Negating the Legal Problem of Having 'Two Masters': A Framework for L3C Fiduciary Duties and Accountability
John E. Tyler III
Ewing Marion Kauffman Foundation
December 1, 2010
Vermont Law Review, Vol. 35, No. 1, pp. 117-161, 2010
The low profit limited liability company (“L3C”) is a new business form that unites pursuing charitable, exempt purposes and generating and distributing profits. The L3C is a creature of state statute appended to the limited liability company form that adapts standards from the law applied to private foundations called program related investments (“PRI”).
Hybrid pursuits can create confusion for investors, managers, creditors, policy makers, and regulators. Properly understood and implemented, one of the innovations of the L3C is how the enabling statutes properly order priorities and creates fiduciary responsibilities thereby providing degrees of predictability and consistency for the L3C to be a viable strategy for addressing certain charitable, exempt needs and opportunities. Among these could be alternatives to relying on government to scale particular charitable endeavors, capital to help bridge the “valley of death” that denies opportunities presented by university research, and resources to retool supply chains and retrain talent in ways that serve new industries and opportunities and revitalize economically disadvantaged areas.
This article proposes a framework for L3C fiduciary duties and their enforcement, particularly with regard to the duty of care. The article first describes the L3C and its most relevant characteristics before addressing common misconceptions among advocates and detractors. The article then discusses how fiduciary duties in traditional business forms have approached hybrid purposes, including an in-depth analysis of constituency statutes in this context. The article then proposes a framework for L3C fiduciary duties that distinguishes them from existing for profit corporate and LLC forms and tax exempt forms, including approaches to enforcement and accountability.
The article is critical of certain actual and perceived mis-applications of the new form by some proponents, tries to address certain criticisms, and suggests a framework for fiduciary duties and regulatory oversight. The article also distinguishes the L3C from existing corporate forms (for profit and not for profit), the LLC form from which it emerges, and constituency statutes.
Number of Pages in PDF File: 45
Keywords: L3C, Low Profit Limited Liability Company, Program Related Investment, PRI, Fiduciary Duties, Hybrid, Private Foundation
JEL Classification: K10, K19, K20, L30, L33
Date posted: February 27, 2011 ; Last revised: March 14, 2011