Relates to establishing the L3C act regarding low-profit limited liability companies

Section 2 amends section 102 of the limited liability company (LLC) law to provide for the creation of a new business entity, a "low- profit" limited liability company (L3C), whose purpose is to further the accomplishment of one or more charitable purposes set forth within section 170(c)(2)(B) of the internal revenue code of 1986 -- alternatively cited as 26 United States Code sec. 170( c )(2)(B) provided however such business entity would not have been formed but for its relationship to the accomplishment of charitable or education purposes. L3C entities shall not have as a significant purpose the creation of income or appreciation of property, and L3C entities shall not have as a purpose the accomplishment of one or more political or legislative purposes set forth within section 170(c) (2)(D) of the internal revenue code of 1986.

Sections 3-6 amend sections 102,204,21 and 701, respectively, of the limited liability company law to conform the new business entity to the statutory requirements governing LLCs.

Justification

1. Need for a new type of limited liability company (LLC).

The L3C is a low-profit limited liability company (LLC). L3Cs are a hybrid legal structure combining the financial advantages of limited liability companies (LLCs), with the social advantages of a non-profit entity. An L3C runs like a regular business and is profitable, but its primary focus is not to make money. The L3C's primary purpose is socially beneficial aims, with profit making a secondar y goal. (See, http://americansforcommunitydevelopment.org/about.html, and see http://en.wikipedia.org/wiki/L3C.)

L3Cs are not nonprofits; they are for-profit ventures that, under their state charter, must have a primary goal of performing a socia lly beneficial purpose, rather than earning money. The business entity form and legislation were drafted with the goal of complying w ith federal Internal Revenue Service (IRS) regulations relevant to Program Related Investments (PRIs) by foundations. Such compliance is anticipated to make L3Cs useful vehicles for PRI investment - and it is hoped that such structure and compliance might obviate th e need for individual IRS private letter rulings, although as of November 10, 2009, neither the IRS and Congress had "signed off' on L3Cs (See http://nonprofitlaw.proskauer.com/2009/11 /articles/formation/the"possibilities-of-the-13c/, and see http://www. wisbar.org/am/template.cfm ?section= Newsletters Grouo&temol ate=/customsource/community/ enews/newsletter.cfm&issuemonth=9&issueyear=2009&grouoname=BUSL).

It is also envisioned to facilitate tranched investing by foundations, with a PRI taking the first risk position and thereby taking much of the risk out of the venture for other investors in lower tranches. Under such circumstances, the rest of the investment levels or tranches would be more attractive to commercial investment because the PRI involvement could improve the credit rating and lower the cost of capital.

Judging from the examples of other states that have enacted L3C legislation, such entities are particularly favorable to equity investment because the foundations can take the highest risk at little or no return. Such tranched investing has been described as turning the venture capital model on its head, giving many social enterprises a low enough cost of capital that they are able to be self sustainable.

II. Purpose of Low-Profit Limited Liability Companies (L3Cs).

The L3C was created by Robert Lang, CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation, with input from tax law specialists and members of the nonprofit sector. There are five goals underlying the creation of L3Cs.

First, LC3s are designed to comply 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. Assuming the IRS confirms such compliance, or such question is obviated by congressional action, foundations can buy ownership shares, make loans to, or otherwise financially interact with the L3C, using all or part of that portion of its assets that would normally be given out annually as grants. Obviously, however, as for-profit entities, L3Cs do not require PRIs to exist or operate.

Second, L3Cs share the operating efficiencies of a for-profit along with a reduced regulatory structure, and the social purposes of a nonprofit organization. As an LLC, L3Cs 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 and efficiencies.

Third, in an L3C, a foundation and/or its partner organizations can retain ownership and management rights of the L3C, while possibly recovering its/their principal investment and potentially realizing a capital gain.

Fourth, L3Cs can facilitate tranching or layering of capital involvement into business entities with social purposes. One of the central premises 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 investors a very safe investment with market return, and other investors (perhaps without similar profit-making requirements) receiving less returns and higher risk allocations. 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.

Finally, the L3C entity and structure can create a desirable climate for the investment of private capital. Because of its tranching structure, an L3C could be partially funded - in a lowered-risk tranche -- by money intended for prudent investments only, such as state pension funds. This opens the door to trillions of dollars not currently available for socially beneficial investment.

III. L3C legislation in other states.

There are a number of other states that have introduced and/or enacted L3C legislation, as have the Crow Indian Nation and the Oglala Sioux Tribe. The states introducing and/or enacting such legislation include:

Arkansas - introduced on March 9, 2009 Crow Indian Nation - enacted on January 13, 2009 Illinois - enacted on August 4, 2009 Missouri - introduced in February of 2009 Michigan - enacted on January 15, 2009 North Carolina - introduced on February 25, 2008 Oregon - introduced during 2009 regular session Oglala Sioux Tribe - enacted on July 2, 2009 Tennessee - introduced in February of 2009 Utah - enacted on March 23, 2009 Vermont - enacted on April 30, 2008 Wyoming - enacted on February 26, 2009

There are a number of other states considering L3C legislation, including Georgia, Louisiana, and Missouri.

Prior legislative history

None. This is a new bill.

Fiscal implications

There shall be no cost to the State or localities.

Effective date

Immediately upon enactment.