A New Form of Business Entity in Illinois

About two years ago, an new law was enacted which provided for the formation of Low-Profit Limited Liability Companies, referred to as L3C’s.  These entities are organized to do good for a charitable purpose, but are still formed to be for-profit entities.  Since these are organized as a for-profit entity, these organizations can attract the capital that is necessary for their purposes without relying on grants or other charitable contributions.

These are vehicles which can offer more flexible, leveraged solutions to complex problems in our society.  For instance, if a private foundation wanted to operate a training program for residents in an economically depressed neighborhood, the L3C could open a laundry in that neighborhood, the private foundation could do the training.  A normal for-profit company might be unwilling to take the entire risk, so a private foundation can do a joint venture with the L3C to further the charitable purposes of the private foundation.

L3C’s are intended to make it possible for both the tax-exempt private foundation and for profit entities to invest in a way that significantly furthers one or more charitable or educational purposes.  Both tax-exempt and for-profit companies can invest in and be members of an L3C.  As with a regular  LLC, the L3C can be managed by one or more of its members or by an outside manager.

A big advantage for a private foundation is that the investment in the L3C is intended to qualify as a program related investment under the Internal Revenue Code, although the IRS has failed to either recognize the L3C entity or provide a procedure for determining if the investment in an L3C is considered program related.  Once the IRS formally recognizes these vehicles, it will be easier to use the L3C.  Until then, a private foundation will have to file to obtain a private letter ruling for each program related investment made by a private foundation, which can be time consuming and costly.

This new entity may offer new options for achieving a charitable purpose in the future to help solve many of the problems in our society.