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Low-Profits

The New Year brings another new form of business organization to the non-profit world. Just when you got comfortable with the well-established non-profit corporation, along came the British-devised Community Interest Corporation (which I dubbed the Some-Profit Organization or "SPO" because it amounts to a non-profit that generates "some profit" to investors).

Now, you have to learn about something new called the L3C.

3C is the rather awkward designation for an idea known formally as a Low-Profit Limited Liability Company, or even as a Charitable LLC. It should really be called a 3LC, which makes more sense to me and is easier to say out loud. Regardless of its nomenclature, this new form of organization may unleash hundreds of millions of additional foundation dollars into the economy.

Just as necessity is the mother of invention, the IRS private foundation regulations inspired the invention of the L3C. Those regulations require most foundations and charitable trusts to give away at least 5 percent of their net assets every year. If a foundation's investment in or loan to an otherwise for-profit business was considered a Program Related Investment (PRI) it could count toward that 5 percent payout.

Until the still-untested L3C came along, foundations were rightfully wary of such investments because there was no before-the-fact way to know the IRS would regard them as PRIs. The only way to be certain was to seek a private letter ruling, which could take six to eight months and for which the IRS charges $8,700. And that does not include the rather high legal costs of such a ruling. Not surprisingly, few foundations invested in otherwise promising programs that their lawyers and CFOs could not be certain were going to qualify. As a result, the foundations did not "pay out" as much as they might have to many worthy efforts.

Smart lawyers (among them, Washington-based Marc Owens, former head of the IRS' tax-exempt organizations division) conjured up a legal entity that would absolutely satisfy the PRI requirements and obviate the need for a private letter ruling, yet still provide foundation managers with a high comfort level.

The key to meeting most of the requirements is the broad acceptance among the states of the LLC and its organizational flexibility. One of its great advantages is that with astute drafting of an LLC's operating agreement you can legally avoid state laws that put shareholder interests first. Voila! The founders of the LLC can simply agree up front that their primary purpose is social good rather than the maximization of profit.

That set the stage for the "low-profit" LLC idea. As of this writing an effort is underway in North Carolina to codify the L3C form and use it for furniture companies that are on the verge of going under or leaving the state. As L3Cs, these companies would be able to accept investments from private (non-profit) foundations, which would not demand as high a return on investment as would traditional for-profit investors. And as L3Cs they would qualify as PRIs, which in turn would likely open the deep pockets of the foundations wishing to promote the community interest of a thriving furniture industry in the state. As a legal matter, once the L3C form of business organization is accepted in North Carolina, it would be valid in all 50 states under the "full faith and credit" clause of the Constitution.

It appears the L3C is further along in this country than its British-import cousin the SPO. Both amount to a needed middle ground in our free market economy. The market doesn't easily recognize any speed other than the maximum, yet slowing down every now and then is often a good idea. The L3C and the SPO are tools the free marketers can use to slow down a bit to serve the public interest and still make a bit of money.


Bruce D. Collins is the corporate vice president and general counsel of C-SPAN, based in Washington, D.C.

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