A low-profit limited liability company, or L3C, is an LLC whose primary purpose is not to earn a profit but instead to significantly further the accomplishment of one or more charitable or educational purposes. It may still make a profit, though, and is not a non-profit as that term is used in corporate non-profit statutes or in federal income tax regulations.
L3Cs are well-intentioned as a way to increase the flow of capital to socially beneficial enterprises, but they don’t provide the principal benefits their promoters tout and can easily mislead investors and foundations. Nonetheless, nine states so far have passed legislation authorizing L3Cs, although the momentum for state passage seems to be weakening. No states have passed L3C legislation this year, and only one in 2011 (Rhode Island), one in 2010 (Louisiana), and two in 2009 (Maine and Illinois).
I wrote last September about some of the problems with L3Cs, when Rhode Island passed its L3C statute, here. In that post I discussed an article by Bill Callison, a partner at Faegre and Benson, and Allan Vestal, Dean and Professor of Law at Drake University: J. William Callison & Allan Vestal, The L3C Illusion: Why Low-Profit Limited Liability Companies Will Not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial Ventures, 35 Vt. L. Rev. 273 (2010). I also discussed an article by Daniel Kleinberger, Professor of Law at William Mitchell College of Law, that analyzes a number of L3C issues: Daniel S. Kleinberger, A Myth Deconstructed: The “Emperor’s New Clothes” on the Low-Profit Limited Liability Company, 35 Del. J. Corp. L. 879 (2010). These articles pointed out some of the significant problems with L3Cs.
In my last L3C post I lamented the communication gap between (a) the lawyers and law professors who analyze and criticize the L3C form, and (b) the state legislators who hear only the alleged benefits from L3C promoters. I suggested then that one of the national bodies with expertise and a broad constituency, such as the National Conference of Commissioners on Uniform State Laws, the American Law Institute, or the Business Law Section or Tax Law Section of the American Bar Association, should play a more active role in making recommendations to the states.
Lo and behold, the Business Law Section of the American Bar Association, on behalf of its committees on LLCs and nonprofit organizations, has taken action to oppose L3Cs. The Section submitted a letter dated April 19, 2012, including a detailed, 17-page Appendix, to Steve Simon, the Assistant Minority Leader of the Minnesota House of Representatives. The letter detailed the problems with the proposed L3C structure and urged Representative Simon to oppose a bill before the Minnesota legislature, House File No. 2702, which was intended to authorize L3Cs. And although I don’t know how the politics played out, after its introduction and first reading, House File No. 2702 received no hearings or other action during the legislative session that ended in May.
The major points of the letter are that L3Cs will not stimulate private foundation investment in socially beneficial enterprises, and that the type of tranched L3C investment by private foundations, as urged by L3C advocates, is highly risky for private foundations and will not be accepted by them. Other criticisms are that (1) L3C promoters erroneously imply that state law can streamline and simplify federal tax law compliance; (2) the model form of L3C statute proposed by advocates has a serious technical flaw; and (3) most state LLC statutes already permit the type of ventures contemplated by the L3C legislation. The letter and its appendix are a thorough and well-written communication.
This action by the ABA’s Business Law Section is a big and positive step in the right direction, and I commend the Section. Although the letter makes clear that it is not the official position of the entire ABA, it does represent the views of the ABA’s Business Law Section, which has about 54,000 members. Furthermore, it represents the considered opinions of both the Committee on Limited Liability Companies, Partnerships and Unincorporated Entities and the Committee on Nonprofit Organizations. The lawyers and academics who sit on these committees represent the perspectives of both the business lawyers who help clients form, operate, and invest in LLCs and other business entities and the lawyers who represent a variety of non-profit organizations, both public charities and private foundations.