Low-profit limited liability companies (L3C) are business entities created mainly for charitable reasons, allowed in eight states and Puerto Rico. The entities are required to register with the appropriate state agencies and pursue their chosen charitable ends. However, L3Cs can make a profit for their owners as long as the charitable goals come first in contrast with non-profit corporations. For example, investors could use an L3C to invent a new type of solar panel that could revolutionize clean energy while eventually making a profit. Also, L3Cs allow the owners to retain the benefits of the limited liability corporation (LLC) form. L3Cs follow many of the same requirements of management, filings, and taxes of any LLC, but may have to provide evidence of their charitable activities. Given that the entities can make a profit, L3Cs must pay taxes and money given to them cannot be deducted from taxes.
Many individuals create L3Cs as an avenue for their foundation to meet program-related investment (PRI) requirements. Foundations often use the tax-beneficial tool of PRI to invest in charities, but they face many hurdles in proving that the investment meets the requirements to receive the beneficial tax treatment. L3Cs can avoid this difficulty as they can be set-up to begin with to fulfill the requirements that PRI be for charitable purposes, with limited profit motives, and not being for political purposes. The Internal Revenue Service (IRS) tends to be unpredictable regarding treatment of PRIs, but foundations have been able to rely on investing in L3Cs without facing IRS skepticism of the charitable goals.
[Last updated in February of 2022 by the Wex Definitions Team]
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