September 20, 2011
Low-Profit Limited Liability Companies (L3Cs): Will Someone Rid Us of These Pesky Beasts
Posted by Bill Callison

  I must have done something bad, and the punishment must have been that I be would followed around by L3Cs in order that they can suck out more and more of my time.  Yesterday was no exception, and I had 4 encounters with the L3C.

 First, I was forwarded a copy of Doug Batey’s recent posting on L3Cs at, in which he notes that Rhode Island has adopted L3C provisions, refers to in a couple of articles (one mine, one Dan Kleinberger’s) taking positions against L3Cs, wonders why there has been little legislative traction in opposing L3Cs, and hopes that organizations like the ABA Business Law Section, NCCUSL, and the ALI will take positions against L3Cs.  Batey writes:

To quote Paul Newman in Cool Hand Luke: “What we’ve got here is a failure to communicate.” The business lawyers and professors are analyzing and criticizing the L3C structure, the non-profit community and other promoters are pushing the L3C law hard at a local level, and state legislatures are passing the laws. But the issues raised by the commentators are apparently being ignored. This is not a good way to make public policy.

 Second, in her posting on The ‘Glom concerning law firm structures, Ustia Rodrigues linked to her Entity and Identity article in which she “posits that the nonprofit form can create a special ‘warm-glow’ identity that cannot be replicated by the for-profit form.”  Later, Rodrigues discusses L3Cs and notes that “social identity theory provides further [i.e., in addition to tax and other technical concerns] ground for skepticism about this emerging form.”  This moved the day a bit in the right direction.

 Third, in trade for a draft of my forthcoming article about non-business family LLCs (for vacation home ownership, for example), I received a draft article on “using LLCs for quasi-charitable endeavors” (aka “social enterprise”).  The article will be published early next year in a William Mitchell Law Review symposium issue focusing on non-business uses for LLCs and is well written and thoughtful (and I won’t steal any of its thunder), but it seems to me to be more or less agnostic (or maybe somewhat positive) about L3Cs.  A step sideways, but a bit ruefully.

 Finally, I was forwarded (for the fourth time) an email advertising flyer for a “Unique Pre-Conference Event” by the Council on Foundations.  The Event “will explain what the L3C is and how Community Foundation can take advantage of a new tool in their toolbox.”  Continuing, the flyer states:

 The L3C is a hot topic in the nonprofit sector that may change the way many socially beneficial services are delivered.  It may represent a whole new paradigm in public private partnerships.  For the Community Foundation it offers new ways to organize multiple stockholder entities.

 The creator of the L3C, Robert Lang, calls it the “for profit with the nonprofit soul.”  It operates in the space between the nonprofit and the pure for profit organization. . . .  It is uniquely designed to use Program Related Investments. . . .

 Paradigms, public private partnerships, multiple shareholder entities, souls, and program related investments.  Yikes!  I started twitching again.  Fortunately, today was the day I planned to speak to L3Cs in The ‘Glom.

 I have previously written two articles (a short piece in Business Law Today and, with Allan Vestal, a longer piece at 35 Vt. L. Rev. 273 ( in which it is argued (quite convincingly I might add!) that:  (a) L3Cs accomplish nothing in their alleged attempt to facilitate program related investments by private foundations; (b) foundations that invest in tranched L3Cs (in which they take a lower return, riskier position in order to facilitate private investments) run a significant risk of creating “private benefit” and jeopardizing their tax exempt status; (c) L3Cs make a mess of things when applying fiduciary duty principles (unless the operating agreement is very carefully drafted) and the alleged simplification they add to such state law questions is nonexistent; and (d) although L3Cs may achieve “branding”,  it is not the role of business entity law to create brands and it is uncertain what the L3C brand stands for (naiveté, perhaps?).  In essence, I argue that without significant and improbable tax law changes the L3C is an entity whose time likely will never come.  Until then, in my view L3Cs are useless gadgets that are being pushed by some promoters as a panacea for an undefined illness.

 In response to Batey’s request that organized bar forces address the L3C, I can say that the LLC and Partnership committee and Nonprofit Organization committee of the ABA Business Law Section have actively opposed L3Cs and are working to finalize a legislative position paper setting forth their bases for opposition.  NCCUSL is not considering adding L3C language to its uniform LLC statute, at least in part because knowledgeable lawyers on “the Joint Editorial Board” have told it that L3Cs are not worthy of  pursuing (indeed, not worthy at all).  I do not think ALI is looking at these things.

 Like Poe’s “miasma of the tarn” (aka swamp gas) there is a general odor of L3Cs in the air.  Those of you who teach business law and those of you who practice business law should be aware of the L3C concept, might want to develop an understanding of it, and, hopefully, when asked will take positions opposed to it.

My favorite comment on L3Cs was made by David Chernoff, associate general counsel at the MacArthur Foundation, in L3Cs:  Less Than Meets the Eye, Taxation of Exempts (May/June 2010);

 Perhaps instead of referring to a low-profit LLC, a better name would be low-income LLC.  That name would yield the acronym LILLAC.  Such bushes are indeed eye-catching and produce a seductively sweet fragrance – for a while.  Then they just fade away.

Unfortunately, people are not getting the message that the darned (I can think of other words) things do not do as advertised.  Please help make L3Cs just fade away.

| Bookmark

TrackBacks (0)

TrackBack URL for this entry:

Links to weblogs that reference Low-Profit Limited Liability Companies (L3Cs): Will Someone Rid Us of These Pesky Beasts:

Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
January 2019
Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
Miscellaneous Links