As of January 2009, Michigan is one of the few states to offer a new form of business entity. If your business is for profit, but its primary focus is to accomplish socially beneficial acts, you may want to organize as a low profit limited liability, or an L3C.
The L3C is structured like any other limited liability company, with all the flexibility and advantages of a normal limited liability company, including being treated as a “pass through” entity for federal tax purposes. However, the L3C must satisfy certain criteria to prove that its main goal is not to make a profit.
L3C’s are designed to qualify as a recipient of Program-Related Investments, or PRIs. PRIs are IRS-sanctioned investments made by private foundations to support a charitable project or activity. As a result of their charitable purpose, PRIs receive special treatment under federal tax law.
Historically, foundations have been reluctant to invest in for-profit businesses through the use of PRIs because of complex and costly IRS requirements to do so. The L3C removes many of these hurdles and costs.
Hopefully, the L3C will make it easier for foundations to invest in Michigan’s community and economic revitalization.
–UPDATE–
Since this article was originally posted, the IRS has not officially recognized the L3C structure as a qualified PRI program. As a result, it is better in most cases to form a typical LLC or Non-Profit Corporation instead. The attorneys of Demorest Law Firm can help you navigate which is better-suited for your specific situation.
Contact us today for more information.
“However, the L3C must satisfy certain criteria to prove that its main goal is not to make a profit.”
I must admit that I am hoping this becomes the case however right now there is nothing that i know about that creates this criteria, however I am interested in learning more about it.
Thank you,
Effective January 16, 2009, MCL 450.4102 was amended to include the following definition of “low-profit limited liability company”:
(m) “Low-profit limited liability company” means a limited liability company that has included in its articles of organization a purpose that meets, and that at all times conducts its activities to meet, all of the following requirements:
(i) The limited liability company significantly furthers the accomplishment of 1 or more charitable or educational purposes described in section 170(c)(2)(B) of the internal revenue code, 26 USC 170, and would not have been formed except to accomplish those charitable or educational purposes.
(ii) The production of income or appreciation of property is not a significant purpose of the limited liability company. However, in the absence of other factors, the fact that a limited liability company produces significant income or capital appreciation is not conclusive evidence of a significant purpose involving the production of income or the appreciation of property.
(iii) The purposes of the limited liability company do not include accomplishing 1 or more political or legislative purposes described in section 170(c)(2)(D) of the internal revenue code, 26 USC 170.
(Not intended as legal advice, see link to disclaimer at the bottom of the page.)
Agreed. I have also read that. However vague language is used to construct a non enforceable structure.
“significant income” is not defined nor are many of the other ambiguous terms.
You actually don’t have to prove any of these to be considered a L3C. That is my main concern. The burden of proof lies with the individual making statements and not in being verifiable.
(And I am not taking this as legal advice, just trying to further the conversation about L3C’s lack of oversight)