North Carolina’s New Low-Profit Limited Liability Company (L3C) – Opportunities and Unanswered Questions

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Robinson Bradshaw Publication
Aug. 5, 2010

North Carolina recently joined a handful of other states, including Maine, Michigan, Utah, Vermont, and Wyoming, in creating a new type of corporate designation, the low-profit limited liability company (also known as the L3C). The L3C has been called “the for-profit with a non-profit soul,”1 but such entities are not nonprofit charitable organizations. L3C is a new hybrid legal structure designed for entities with a primary purpose of achieving socially beneficial objectives and a secondary purpose of generating profit.

The primary goal of L3Cs is to attract additional capital to socially beneficial projects. L3Cs offer a new opportunity to layer investment in such projects and provide attractive investment options for both private foundations and other investors. Private foundations will invest in the riskiest layer of investment but seek the lowest return (as opposed to the traditional private investment model where the riskiest investment receives the highest return). Additional layers of investment with lower risk and higher return can then be offered to investors seeking a profit but also desiring to contribute to the social cause of the L3C. This layering provides two advantages: (1) socially beneficial projects can attract outside investors through lower risk and better returns because private foundations will absorb the riskiest layer of investment yet receive the lowest rate of return, and (2) private foundations can earn a return on contributions to such projects (which is increasingly important in a time when private foundations have seen traditional investments decline in value) while achieving their philanthropic goals.

The benefits of L3Cs may be attractive for industries and projects struggling to find financing in the current economy. North Carolina’s legislation was, in part, adopted to help struggling furniture and textile manufactures through L3Cs established to buy, renovate, make “green,” and lease factories to manufacturers at a low rental rate. L3Cs may also benefit environmental and health-related start-up businesses, which often have a social mission. Newspapers, charter schools, nursing homes, and other such businesses also may benefit.

As a form of limited liability company, L3Cs offer the same liability protection, flexible ownership and management structure, and pass through tax status as other limited liability companies. In order to qualify as an L3C, the company must be organized and operated (1) to accomplish a charitable or educational purpose, (2) so that production of income or the appreciation of property is not a significant purpose of the company (significant income or capital appreciation by itself, without other factors, is not conclusive evidence of a significant purpose to produce income or accumulate capital), and (3) without seeking to accomplish a political or legislative purpose.2 These requirements must be stated in the articles of organization of an L3C, and the name of the L3C must contain the words “low-profit limited liability company” or “L3C.”

L3Cs are intended to provide private foundations an inexpensive and reliable framework for investing in for-profit entities that qualify as Program Related Investments (PRIs). The charitable purpose requirements for L3Cs above closely track the Internal Revenue Code’s requirements for PRIs. Through PRIs, private foundations are allowed to invest in for-profit ventures that further the foundation’s exempt charitable purposes. The rules related to PRIs, however, do not make clear when a particular investment qualifies as PRI. If an investment does not qualify as PRI, the foundation may be subject to a 10% excise tax on the investment and foundation managers held liable for the same amount.3 As a result, most private foundations are unwilling to risk making PRIs without a private letter ruling approving their investment as such. Accordingly, PRIs are expensive, complex, and cumbersome for private foundations to make.4 L3Cs are intended to respond to such uncertainty by offering private foundations simple, transparent, and inexpensive investments in for-profit ventures that, by definition, qualify as PRI. This legislation is an important first step, but questions remain.

While the potential benefits of L3Cs are substantial, it is important to note that state legislation is only the first step towards realizing those benefits. Currently, the federal government has not issued a private letter ruling or adopted federal legislation or regulations facilitating the treatment of investments in L3Cs as PRIs for private foundations. By mirroring the Internal Revenue Code requirements for PRIs, L3C legislation attempts to bypass the need for a private letter ruling. Still, without federal legislation, regulation, or private letter ruling, uncertainty remains. Several organizations, such as the Council on Foundations, support federal legislation recognizing L3C investments as PRI, but it is unclear if or when such legislation will be adopted. Without further action, the same uncertainty surrounding other PRIs exists for investments in L3Cs. In light of this uncertainty, some have expressed concern that the L3C legislation is potentially misleading, causing investors and private foundations to believe that L3Cs qualify as PRIs.5

North Carolina’s legislation is the first step to realizing the potential benefits of the L3C. In the future, L3Cs may provide an opportunity for socially beneficial projects to attract greater funding and investment in a time when many organizations need new sources of financing. Furthermore, private foundations potentially have an inexpensive and transparent way to earn a return on investments in socially beneficial projects while furthering their tax-exempt charitable purposes.

If your organization has questions about the opportunities created by L3Cs, please do not hesitate to contact either Dianne Chipps Bailey or Luke Foster.


1. Robert Lang, The L3C & Economic Development, Americans for Community Development.
2. S.B. 308, 2010 (N.C.).
3. 6 U.S.C. § 4944 (2010).
4. Only 5% of private foundations make PRIs. Heather Peeler, The L3C: A New Tool for Social Enterprise, Community Wealth Vanguard.
5. North Carolina Bar Association RULLCA Ad Hoc Committee, Nonprofit Subcommittee Report, March 23, 2010.

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