In the News

What's next for the L3C?

Wednesday, June 9, 2010
by Rick Zwetsch

What's Next?

Many L3C entrepreneurs feel that any legislation or attention directed toward the L3C is a major accomplishment. They are proud of the momentum that has been increasing in the past year and are hopeful that it will continue to build. As legislation continues to come together in various states and the spotlight shines brighter on the L3C, the more optimistic their outlook. That said, most of these entrepreneurs also see somekey, tangible steps that need to be taken in the next couple of yearsto make the movement even more viable and widespread.

Further Legislation

Many L3C entrepreneurs said that while they are happy to see L3C legislation in several states, they really thinkmore widespread legislation, be it state-by-state in all 50 states or at the federal level,is necessary to make the L3C be seen as a viable and solid choice for abusiness structure. Along those lines, they also think the IRS needs to make a ruling to let foundations know that L3Cs do indeed qualify for PRI. While some have plowed forward anyway, others are waiting on such legislation to proceed with their L3C business idea:

We need to hear from the IRS. There needs to be some very specific language that addresses the L3C and I think that with some specific language and criteria from the IRS, the foundation community can then engage in another level of conversation with L3Cs. I think the reality that L3Cs are only supported presently in a handful of states is a problem. We need to see access to L3Cs across the board before I think it will be seen as really credible.

—Brendan McCrann, Future Pointe, L3C; Denver


The most important next step is at the federal legislative level. The L3C will remain just an LLC with a charitable mission until the federal government and IRS acknowledge the demand for new social enterprise structures and the value hybrid business models bring, and begins to take action developing the right safeguards, reporting requirements, etc. to enable this other sector to emerge.

—Michael Moreland, SEEDR L3C; Atlanta


We are waiting for federal legislation. I am reluctant to push any newspaper to be an L3C without clear ruling from the IRS that it won't be a problem.

—Jennifer Towery, PeoriaJournal Star; Peoria, IL


Several attorneys have seen the latest summary of the proposed federal L3C bill and are hopeful that the bill is making progress; although it's anyone's guess how long it might take to get through Congress. The current version of the bill, they said, is an improvement over previous incarnations and would help turn the legal tide toward the L3C. The main objective of the proposed legislation is to facilitate PRIs by private foundations to L3Cs, in part by amending section 4944(c) of the Code:


The current draft I have seen is that there would be a presumption if you're an L3C, a program-related investment would be valid. And that would help a lot. I think the biggest hurdle right now is from a PRI standpoint—the L3C doesn't necessarily help and legally doesn't make it any more likely that you're going to be able to attain PRI… I think lawyers who have studied it are skeptical at best but I think that would change if there was some federal legislation that truly gave the L3C an advantage with respect to facilitating PRI investments.

—Bruce Campbell, Campbell Law Group; Boulder, CO


The current version will provide for an expedited review process by the IRS should an L3C or other social-purpose business wish to have any purported PRIs it receives confirmed to be PRIs. Today if a private letter ruling is sought, the process needs to be initiated by the foundation, not the business, and if there are three or four foundations looking to invest in the same business, each has to go out and get a private letter ruling. With this legislation, one ruling can be done by the business itself and all foundations would have the right to rely on it. I think is a much more efficient, cost-effective and rational way of handling it.

—Marc Lane, Marc J. Lane Advisors, L3C; Chicago

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