North Carolina Becomes the First State to Drop L3Cs

Last month North Carolina Governor Pat McCrory signed into law a new LLC Act, which among other things removed the prior law’s authorization of low-profit LLCs, or L3Cs. North Carolina is the first state to authorize L3Cs and then later to delete the authorization. L3Cs have been controversial – promoted by some as a way to increase the flow of capital to socially beneficial enterprises, but criticized by others as a flawed type of LLC that doesn’t achieve its goals.

North Carolina’s current statute authorizes L3Cs, and requires that an L3C’s name contain the words “low-profit limited liability company” or the abbreviation “L3C.” N.C. Gen. Stat. §§ 57C-2-01(d), 55D-20. The new LLC Act deletes all references to L3Cs, except that it modifies Section 55D-20 to allow any L3C formed under the existing statute to continue to use “low-profit limited liability company” or “L3C” in its name. The new LLC Act will become effective January 1, 2014.

An L3C is a relatively new type of LLC, which attempts to combine a charitable purpose with a profit-making motive. It is not a non-profit and is taxed on its profits like any other LLC, but its primary purpose is to significantly further the accomplishment of one or more charitable or educational purposes. Advocates of L3Cs suggest that they will encourage investment by private foundations in L3C enterprises. An L3C is required to refer to itself as a “low-profit limited liability company” or as an “L3C.”

Nine states have authorized L3Cs: Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming. According to InterSector Partners, approximately 850 L3Cs have been formed in these states.

Commentators have raised questions and concerns about L3Cs. I previously discussed articles by law professors and business lawyers questioning the utility and wisdom of L3Cs, here. Also, last year the Business Law Section of the American Bar Association actively opposed L3Cs by sending a letter to the Assistant Minority Leader of the Minnesota House of Representatives, which I wrote about, here. The legislature was considering L3C legislation and the ABA letter urged that it be rejected. The bill was not passed.

It appears that the messages from commentators and the ABA’s Business Law Section are getting through to the states. The momentum for state passage of L3C legislation seems to be weakening – it has been almost two years since Rhode Island, the last state to authorize L3Cs, passed its legislation. North Carolina’s rejection of L3Cs is a step in the right direction, and perhaps a harbinger of more to come.

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