The L³C is not a nonprofit. It is a for profit venture that under its state charter must have a primary goal of performing a socially beneficial purpose not earning money. The legislation was specifically written to dovetail with the federal IRS regulations relevant to Program Related Investments (PRIs) by foundations. This makes it a perfect vessel for PRI investment without the need for IRS private letter rulings. It also facilitates tranched investing with the PRI usually taking first risk position thereby taking much of the risk out of the venture for other investors in lower tranches. The rest of the investment levels or tranches become more attractive to commercial investment by improving the credit rating and thereby lowering the cost of capital. It is particularly favorable to equity investment. Because the foundations take the highest risk at little or no return, it essentially turns the venture capital model on its head and gives many social enterprises a low enough cost of capital that they are able to be self sustainable.

The L³C is a new form of limited liability company which combines the best features of a for-profit LLC with the socially beneficial aspects of a nonprofit. It is the for-profit with a nonprofit soul.

The L³C was created for several purposes:

    • It specifically complies with IRS regulations regarding Program Related Investments (PRIs). PRIs are IRS sanctioned investments made by foundations, often into for-profit business ventures; to support charitable activities, which may involve the potential return of capital within an established period of time. Foundations may buy ownership shares, make loans to, or otherwise financially interact with the L³C, using all or part of that portion of its assets which would normally be given out annually as grants.

    • The L³C embodies the operating efficiencies of a for-profit along with a reduced regulatory structure. As an LLC, it can bring together foundations, trusts, endowment funds, pension funds, individuals, corporations, other for-profits and government entities into an organization designed to achieve social objectives while also operating according to for-profit metrics.

    • Under L³C status, a foundation and its partner organizations retain ownership and management rights of the L³C while possibly recovering its principal investment and potentially realizing a capital gain.

    • Facilitates tranching or layering. The central premise of an L³C 's operation is its use of low-cost capital in high risk ventures and its ability to allocate risk and reward unevenly over a number of investors, thus ensuring some a very safe investment with market return. As is appropriate under the PRI structure, foundations could assume the top risk at very low return, making the rest of the investment far more secure.

    • Creates a desirable climate for the investment of private capital. Because of its tranching structure; an L³C could be partially funded by money intended for prudent investment only such as state pension funds. This opens the door to trillions of dollars not currently available for socially beneficial investment.

An L³C could, for example, buy an empty furniture factory, rehabilitate and re-equip it to be "lean and green" and lease it at very low rates to a furniture company otherwise struggling in today's competitive environment. Hundreds of jobs could be saved or created making the company an engine of economic development.

Additionally, the L³C could enhance the nonprofit structure for museums, concert halls, symphonies, recreational facilities and the hundreds of thousands of nonprofits that perform service for the government under contract, with the government as their primary source of revenue. As long as there is a definable revenue stream; the L³C is a potential vehicle.

We are working with the Council on Foundations and considering recommending future federal legislation to enhance the value, ease of use, and flexibility of the L3C, none is required and no suggestions are now** pending. Under the full faith and credit clause of the Constitution, a Vermont,  Illinois, Michigan, Utah or Wyoming L3C can be used in any of the 50 states.

The L³C was built on the llc structure in order to provide the flexibility of membership and organization needed to cover a wide variety of social enterprise situations. It also makes it very easy for legislators to grasp since it does not create a new structure but merely amends the definition section of the llc acts in most states. That leaves 15+ years of legislation and litigation that is behind the llc intact behind the L³C.

The only reasons other states would need to pass an L³C act would be local pride, keeping the revenue at home, and the fact that in order for state governments to participate or certain state tax benefits to accrue, etc. some states require that the entity involved be one organized under the laws of that state.

Probably more importantly than anything else, the L³C is a brand which stands for all this and more and hopefully as a brand will make the concepts easy to grasp and thereby frequently used. It will also provide a simple basis for any enhancing federal legislation.