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BASIC OVERVIEW OF THE L³C

1. What is the L³C?
2. Are any L³C s already in operation?
3. How can I form an L³C?
4. What if my state has not yet adopted the L³C legislation?
5. How does an L³C differ from a nonprofit charitable organization and how does it differ from a standard for-profit business?

EXAMPLES OF L³C BUSINESSES

1. Can you provide examples of the sort of enterprise that might be organized as an L³C?

FINANCING AN L³C

1. How will L³Cs attract the capital they need?
2. Should foundations be undertaking capital-intensive, high risk joint ventures with for-profit partners?

TAXATION AND IRS–RELEVANT ISSUES

1. How would an L³C be taxed?
2. Are investments in an L³C tax deductible?
3. Does it matter for federal income tax purposes whether an L³C is considered a charitable or non-charitable entity under state law?
4. Would the IRS require L³Cs that are not single-owner entities to file separate returns as partnerships or corporations?
5. Are there any proposed reporting and disclosure requirements that would facilitate the verification of, compliance with L³C requirements and state oversight over charitable organizations and assets? Is there any other current method for the IRS, the states and the public to receive L³C-specific information from a charitable investor?
6. Are special conflict of interest prohibitions necessary, such as a prohibition on participation in a for-profit investment in an L³C by persons related to the managers of the private foundation making the PRI?
7. Is the IRS studying the issue to determine the tax consequences of L³Cs?
8. If a significant portion of an L³Cs capital is provided by investors seeking market rates of return, how can it be said that the production of income is not a significant purpose of the L³C?
9. Does the state legislation allowing for the formation of L³Cs create an opportunity for foundations to circumvent the IRS rules?

ACCOUNTABILITY AS AN L³C

1. What safeguards and enforcement mechanisms are in place to ensure that L³Cs are not only organized for charitable purposes, but they also operate in a manner consistent with those purposes?
2. How can one determine that the for-profit investors in the L³C venture are not receiving improper private benefit and that charitable purposes are being advanced through the L³C?
3. Are there any mandatory provisions that would need to be included in L³C operating agreements to ensure that for-profit interests are subordinate to the company’s charitable purposes?
4. Under what circumstances are economic development projects or job creation programs considered charitable under § 501(c)(3) of the Code?
5. If a private foundation investor is required under the terms of an L³C operating agreement to cover any loss or a portion of a loss to for-profit investors seeking a “market return” on their investment, does this arrangement make the production of income a significant purpose? If a private foundation investor is required under the terms of an L³C operating agreement to make an additional capital investment, does this arrangement make the production of income a significant purpose?
6. What are the factors that determine whether the production of income is a significant purpose?
7. Given that L³Cs are intended to be predominantly charitable, how can state regulators be assured that they will have appropriate oversight over L³Cs?
8. Does the L³Cs designation increase the burden on state and federal regulators?
9. If there is no federal legislation or change in IRS policy concerning PRI and L³Cs, does state L³C legislation serve any purpose?
10. Would it be appropriate for a private foundation to invest in an L³C in which an officer or director had an ownership or other financial interest?

FOUNDATIONS, PRIs AND L³Cs

1. Will the L³C concept reduce transactional costs associated with PRI?
2. Will the promotion of L³Cs cause foundations to shift funds from existing grants and beneficiaries?
3. While there is a minimum distribution requirement of 5%, is there any maximum distribution limitation? Is there any prohibition against investing all the foundation’s assets in PRI?
4. What are the consequences for the foundation investors if it turns out the L³C was not properly structured to meet the IRS requirements for acceptable forms of PRI?
5. Does the L³C designation relieve a foundation from its obligation to exercise due diligence?
6. Are L³Cs "state-created mechanisms" that encourage private foundations to make PRIs – as an alternative to grants?

IS L³C LEGISLATION NECESSARY?

1. Is this federal legislation really necessary?
2. If there is no federal legislation or change in IRS policy concerning PRI and L³Cs, does state L³C legislation serve any purpose?