A Low-Profit Limited Liability Company (L3C) is similar to a regular limited liability company (LLC), but its primary goal is to prioritize charitable purposes over profit. It started in Vermont and can be legally formed in 9 other states across the U.S. including Illinois.

In this blog post, I will explain what an L3C is in clear language. You’ll see how it compares to other companies like LLCs, benefit corporations, and nonprofits. I’ll also show where you can form one in the United States and if it’s right for your social enterprise.

Key Takeaways

An L3C, or Low-Profit Limited Liability Company, is a business that puts social or charitable goals first and profit second.
As of 2024, only 10 states in the U.S. let people start L3Cs. Vermont and Illinois are two of those states.
L3Cs can attract program-related investments (PRIs) from private foundations but do not provide tax deductions for donors like charities do.
Owners get legal protection like an LLC and pay taxes on income through their own returns (pass-through taxation).
The future of L3Cs is still uncertain because few states recognize them and laws may change soon.

Exploring the Definition of an L3C

L3C means Low-Profit Limited Liability Company. This business type mixes parts of a for-profit LLC with features from nonprofit corporations. L3Cs try to make money, but their main goal stays focused on helping a social or charitable cause.

Such a company can earn profits, yet it must keep its mission clear and public benefit first.

People use L3Cs when they want to support causes, such as education or health, while also having some profit for owners and investors. The IRS looks at these companies differently than typical nonprofits; an L3C is not tax-exempt by default under Section 501(c)(3).

Only certain states allow someone to form an L3C today. More details come next about what makes the structure of an L3C unique compared with other limited liability companies.

Key Characteristics of an L3C

An L3C, or low-profit limited liability company, must keep a clear focus on public good. Its main goal is to advance a charitable or educational purpose, not profit. An L3C can earn money, yet making money cannot be its reason for existing.

This distinction makes it different from a normal limited liability corporation that puts profits first.

L3Cs provide legal protection and flexibility much like traditional LLCs. Owners get pass-through taxation; profits and losses move directly to their tax return. The structure allows easy management changes as needs shift.

Laws do not allow an L3C’s primary work to involve political acts or try to change legislation. Instead, ventures often serve public charities or partner with private foundations instead of for-profit corporation models.

States that permit the formation of L3Cs set these rules so groups support social goals while still attracting investments and loans from banks, venture capitalists, and angel investors using Regulation D options if needed.

Comparing L3C and LLC Structures

Low-profit limited liability companies, or L3Cs, follow different rules than standard LLCs. Managers in an L3C can focus on both charitable causes and making money. Traditional limited liability companies usually put profit first because of their fiduciary duty to owners.

L3C statutes give more legal protection for those who want to support educational or social goals. Owners and managers may weigh non-economic factors in decisions while working for the mission.

An LLC could try adding similar language, but it’s not clear if this would change legal duties under state law. Some states allow L3Cs, but others do not recognize them yet. L3Cs use a business structure that helps attract program-related investments from tax-exempt organizations and charitable foundations—something regular limited liability companies struggle with due to strict tax exemption rules.

L3C vs. Charity: Understanding the Differences

After looking at L3C and LLC structures, it helps to see how an L3C compares to a charity. Charities are non-profit organizations with tax-exempt status under federal law. People can give money to a charity and claim that donation as tax-deductible on their taxes.

This big tax benefit drives lots of support each year.

L3Cs can’t offer that. They must pay income, gift, and estate taxes like other business entities do for federal income tax

purposes. An L3C can have owners and investors who get profit payouts, which is not allowed in traditional charities or most other non-profit corporations.

For example, the Small Business Administration treats an L3C much more like a partnership or regular company than like a charity or B Corp. If you want investors for equity financing or plan crowdfunding campaigns, the L3C structure fits better than forming a charity but does not bring the same big tax perks for donors or founders.

The Significance of the L3C Structure

Shifting from L3C vs. Charity, the focus lands on how the L3C structure shapes an organization’s path. The L3C lets founders write their mission right into the company’s rules, so everyone can see what goals matter most.

Leaders do not need to put profit first at all times; they can make choices that support education or help communities, and still keep within legal rules.

Using an L3C, managers honor duties set by business law but also meet social aims—without risking lawsuits for skipping bigger profits. This draws risk-averse investors who want purpose with some security.

States like Vermont and Wyoming have allowed this model since 2008, giving groups like the Crow Indian or Sioux Tribe a legal way to mix business with service. Entities like registered agents and legal entity identifiers play roles here, making sure each L3C follows state rules as a unique business entity.

As more states consider adding these options, entrepreneurs watch closely for tax benefits, finance tools, and ways to attract both startup capital and program-related investments under jobs acts and Small Business Administration guidance.

L3C’s Potential to Attract Investment

L3Cs aim to draw in program-related investments (PRIs) from private foundations. This was one big goal for their creation.

L3C businesses can serve both for profit and social missions, which appeals to some investors. But they do not get the same tax breaks as charities, so some capital sources hesitate. L3Cs must pay taxes on income, making them less attractive than nonprofit groups for foundations or those who want big deductions as taxpayers.

Traditional investors may skip L3Cs because the structure often asks them to accept lower profits, without extra gains or securities to balance the risk. Startups and small business owners might find it hard to gather capital from banks like the Small Business Administration (SBA) due to unclear credit history, rules, or lack of DBA names.

States allowing L3C status can affect the ability to attract these investments too, since not all states support them yet.

States Allowing Incorporation of L3Cs

As of 2024, L3Cs are currently allowed to incorporate in

Illinois
Kansas
Louisiana
Maine
Michigan
North Dakota
Rhode Island
Utah
Vermont
Wyoming.

Legal Protections and Flexibility for L3Cs

An L3C gets the same legal protection as a regular LLC. Owners, or “members,” are not personally responsible for company debts or lawsuits. This shields their personal property if something goes wrong with the business.

States that allow L3Cs give them flexible rules—owners can choose how to run things and split profits. Pass-through taxation applies, so the group does not pay taxes itself; members report income on their own tax returns.

Like an LLC, this helps keep costs low and choices open, making it easy to use DBAs for different projects or services within one organization. Groups using L3C vs LLC structures both enjoy these benefits in places where state laws support them.

Ideal Target Audience for L3C Operations

Groups with a strong charitable or educational goal fit well with the L3C structure. These groups might be museums, libraries, after-school programs, or arts centers. They often need to show their mission in legal documents.

Nonprofits that want limited profit but high social impact should consider this model too. Foundations use L3Cs to support causes and still make small gains.

Companies hoping for big profits from an L3C may face disappointment since these organizations set low profit expectations on purpose. States such as Vermont and Illinois allow L3Cs; so businesses in those states can benefit most right now.

Social enterprises wanting both funding and flexibility also match the ideal target group for forming an L3C.

Assessing the Future Legal Resilience of the L3C Framework

The legal future of the L3C framework remains unclear. Courts have not fully tested this business model yet, so nobody knows if it will stand strong against new challenges. Only a handful of states allow L3C formation, and some lawmakers question if these rules truly protect both investors and social missions.

Regulators may update laws in the coming years. Many people are observing for signs that additional states may change their stance or enhance existing guidelines. For now, those interested in creating an L3C structure must check which states permit L3Cs before moving forward with their plans.

Further Insights on L3Cs

Some organizati

ons use L3C companies to attract new kinds of program-related investments. State lawmakers often face challenges in passing laws for these special company structures, like the L3C.

L3Cs were set up to help private foundations invest in businesses that want to do good. Foundations can only use their money for mission-based work and face strict limits on funding most companies.

L3C laws follow tax rules for program-related investments, or PRIs, making it easier for these groups to qualify as PRI targets. Efforts are ongoing in the United States Congress, with debates about changing PRI rules to make them even clearer and simpler.

Current IRS requirements already allow foundations to fund some types of businesses if they meet certain goals beyond earning money. This is where an L3C helps. It must put a social goal first and profit second—a rule that attracts foundation support more easily than regular LLCs or C corporations.

With continued improvement of tax rules, experts expect more states will consider what states allow l3c formation so foundations can use PRIs widely across America.

Challenges in State Adoption of L3C Legislation

Only six places in the United States currently allow Limited Liability Company Charitable (L3C) formations. Most states and territories do not permit L3Cs at all. Many lawmakers worry about confusing L3Cs with standard companies or nonprofits.

Some believe that these hybrids could misuse funds meant for charity.

Other states hold back because tax agencies like the IRS give few clear rules on how to treat L3Cs. This creates doubt for both investors and attorneys. Lack of national support keeps many legal experts, such as state legislators and nonprofit leaders, cautious about change.

Conclusion

The L3C model blends the mission of a charity with some benefits of a business. It makes it easier for groups to chase social goals while staying efficient and flexible like an LLC.

Many see its simple setup as perfect for foundations who want program-related investments, but not all states support it yet. This new structure offers clear options for those wanting real change without losing sight of profit or purpose.

If you want more details or tools, check state laws and legal guides on L3Cs—it might be your next step toward making a difference in your community.

FAQs

1. What is an L3c company?

An L3c is a low-profit limited liability company. It blends business goals with social aims. This structure supports projects that have both profit and community impact.

2. How does an L3c differ from a regular LLC?

An L3c focuses on helping society first, then making money. A standard LLC puts profit before public good.

3. Who usually starts an L3c?

Nonprofits or people who want to solve community problems often start these companies; they want to attract investments while doing good work.

4. Can investors get tax breaks by funding an L3c?

Some private foundations may get tax benefits if they invest in these organizations; it depends on local rules and how the group operates within its mission.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.

What Is An L3C?