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. 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.
The L3C, or Low Profit Limited Liability Company, is a new legal entity that can be legally formed in six jurisdictions. The concept started in Vermont and is quickly catching on in other states across the U.S. including Illinois.
How is it different from an LLC?
The L3C’s primary purpose is to conduct activities that further a charitable or educational purpose. Earning a profit is its secondary purpose. Traditional corporate law requires that the owners’ interests are exclusively economic. This has been interpreted to mean that corporate directors have a duty to maximize profits for the company’s owners to the exclusion of virtually any other consideration. The statutory framework of the L3C turns the traditional view of the fiduciary duty to maximize the economic return for a company’s owners on its head. Instead, the L3C statutes require the managers to pursue the accomplishment of a charitable or educational purpose. They can earn a profit while pursuing their mission, but earning a profit can’t be a significant purpose of the company.
California may soon offer a new corporate form for social enterprises. The California legislature is considering a bill, S.B. 1463, that would create a new corporate form called the Flexible Purpose Corporation. Similar in purpose to the L3C and the Benefit Corporation, the Flexible Purpose Corporation would provide directors with more flexibility to pursue environmental and social purposes in addition to profitability. To become a flexible purpose corporation, a company’s articles of incorporation would have to specify a “special purpose” that the corporation engages in, which can include but is not limited to charitable activities.
The benefit corporation concept has some similarities to the L3C model but is geared toward corporations rather than LLCs. Like the L3C, benefit corporations pursue a mission that goes beyond making a profit for owners and investors. Importantly, it also provides legal protection for board members that consider social and environmental issues when making decisions on behalf of the corporation.
Services Caritas Law Group, P.C. regularly serves as outside general counsel to tax-exempt and nonprofit organizations. We also represent donors […]
