L3C – An Update by Keren Raz

L3C Update

Since Charity Lawyer’s last blog post on the Low-Profit Limited Liability Company, there has continued to be significant legislative activity across the country in support of the L3C though no corresponding uptick in foundation support.

Legislative Activity

Louisiana, Maine, and North Carolina have signed L3C legislation into law. These three states join the following jurisdictions in recognizing the L3C: Illinois, Michigan, Utah, Vermont, Wyoming, the Oglala Sioux Tribe, and the Crow Indian Nation of Montana. In the following states, legislators have formally introduced L3C legislation: Arkansas, Colorado, Kentucky, Maryland, Massachusetts, Missouri, Montana, New York, North Dakota, Tennessee, and Virginia.

As discussed in a previous blog, the L3C is a new legal entity with the primary purpose to conduct activities that further a charitable or educational purpose. It maintains the flexibility, simplicity, and ease of incorporation of an LLC. It can also generate revenues and a profit, though there are limitations on the quest for profit.

The Three Critical L3C Requirements

  1. First, the L3C must further one of the charitable purposes listed in Section 170(c)(2)(B) of the Internal Revenue Code.
  2. Second, the L3C cannot exist primarily to produce income. Thus, while the L3C can generate revenue, doing so cannot be a primary purpose.
  3. Thirdly, the L3C’s purposes cannot include political or legislative activity, as defined in Section 170(c)(2)(D) of the Code. These three requirements must be included in the L3C’s articles of organization.

Americans for Community Development (ACD), an organization dedicated to encouraging the adoption of the L3C, states on its website that the L3C was designed to comply with IRS regulations regarding program-related investments (PRIs). Private foundations are generally prohibited from investing dollars in ventures that may jeopardize their ability to accomplish their charitable purpose.

However, the IRS does recognize that some investments in for-profit entities may nevertheless accomplish a charitable purpose rather than jeopardize it and has PRI rules that provide exceptions to the general prohibition. A PRI is an investment to accomplish a charitable purpose where income may be produced, as long as income production is not the primary purpose of the investment.

The PRI Challenge

The challenge L3Cs have faced in securing PRIs is reluctance on the part of foundations to make such investments. ACD has drafted federal legislation that would amend the tax code to provide for a rebuttable presumption that L3Cs qualify for PRIs, hoping such a presumption would facilitate PRIs.

However, ACD is still looking for federal legislative support for its proposal. Until then, without a strong expression of interest from one or more private foundations, the possibility of receiving PRIs should still not be the motivating factor in deciding whether to be an L3C.

Vermont’s Social Hybrid Pioneers: Early Observations and Questions to Ponder

Philanthropic Facilitation Act of 2010


Keren Raz is a  Flinn Scholar who attended the University of Arizona, recently earned her J.D. from NYU Law School, and is currently a Social Enterprise Fellow at NYU Law School. We have asked Keren to keep us up to date on developments in the world of Social Enterprise and this is her second post.

Share this post

Scroll to Top

How to Start a Non-Profit Organization

Download our free guide to learn about the many elements needed to run a successful nonprofit organization, as well as how to avoid common pitfalls and mistakes.