In the same way as an LLC is taxed. The L³C may elect pass through status. No federal income tax is imposed on the entity itself unless it elects to be treated as a corporation. Instead, items of income and expense are allocated among the members of the L³C and reported on their returns as the income is earned. It is important to note that, although the L3C serves charitable ends, it is not exempt from taxation. Though L³C's by their nature begin as enterprises that are expected to generate low overall profits, if those businesses generate profits, those profits would be subject to taxation at the rates of tax that apply to their investors. Non profits would usually pay no tax.

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