L3C and Social Enterprise in the State of Illinois
In 2010, Illinois joined a handful of states that allow for a special entity structure called a low-profit, limited liability company, also known as an L3C (805 ILCS 180/1-26). Unlike a Corporation, LLC, Nonprofit, or any other business entity structure, an L3C serves a dual purpose. L3Cs are for-profit companies that serve a socially beneficial objective, above the motivation to earn profits. This kind of structure is sometimes called “social enterprise business” or “mission-driven venture.”
What does this mean in practical terms? It’s a business structure that endows the benefits of a for-profit business (we will discuss this more below) while simultaneously offering some unique advantages usually reserved for nonprofits.
L3C is Basically Structured as an LLC
In general terms, an L3C is basically a limited liability company (LLC). In fact, anyone wishing to create an L3C in Illinois submits the same forms as if he or she were creating an LLC. Like an LLC, an L3C has a flexible ownership structure, provides limited liability for members (protecting their personal assets from the business’ liabilities), and is treated like an LLC for taxation purposes.
What are the Differences Between an LLC and L3C?
The chief difference between an LLC and an L3C is the purpose for which it was created. This may seem a little esoteric, but stick with me:
An L3C’s primary purpose is to achieve a socially beneficial objective or mission.
This doesn’t mean that the L3C cannot earn a profit. Instead, it means that, when it comes to decision-making, the members must always err on the side of benefiting their larger mission, rather than on the side of the bottom line.
Why Would a Company Choose to Organize as an L3C?
At this point, you may be thinking, why in the world would a business choose to organize as an L3C? Especially when an LLC is free to make charitable donations and include its mission in its work anyway? Those are great questions, and there are a couple of very good reasons why a socially-minded entrepreneur might choose to go the L3C route:
L3Cs are still pretty rare, so there is an opportunity to use this distinction for marketing purposes. Consumers have shown time and again that they prefer to align their spending with a cause.
Because L3Cs have their mission encoded into the DNA of the company, they may be uniquely well-placed to attract socially-driven capital investment.
L3Cs are particularly good for businesses that cannot generate enough revenue to attract traditional capital investment (the classic example is a community newspaper).
L3Cs are a good alternative for someone who wants to start a nonprofit, but is concerned about the regulation and oversight that accompanies that structure.
For-profit businesses and non-profits can utilize the L3C as a way to diversify their efforts. A for-profit can create an L3C arm of its company that is more mission-focused without sacrificing the entire company’s bottom line. A nonprofit, by the same token, can invest in an L3C without compromising its tax-exemption status, which brings us to the biggest reason why social entrepreneurs may choose L3Cs….
The IRS has allowed a special exception that private foundations are permitted to make “program-related investments” with their capital in L3Cs. What that means is that tax-exempt organizations can take charitable contributions, invest them in a private business, earn a profit, and return those additional funds to benefit their mission. From the L3C side, this is a whole new field of potential investors looking for businesses that align with their missions.
What Restrictions are Placed on L3Cs?
Of course, the L3C world is not a free-for-all. L3Cs cannot solicit charitable donations, and donors cannot deduct contributions from their taxes (like they could if they donated to a nonprofit organization). Also, the charitable or educational purpose for which the L3C was formed must be at the fore of the company’s decision-making. Profits may not come first. Finally, L3Cs also may not be used to further or accomplish any political or legislative purposes. In the grand scheme of things, the benefits may outweigh these restrictions for many social entrepreneurs.
How Does a Company Organize as an L3C in the State of Illinois?
Organizing as an L3C in the State of Illinois is relatively simple. As we noted above, an L3C is organized in the same way as an LLC. However, it must include the term “L3C” in the name of the organization, instead of “Limited Liability Company” or “LLC.”
The Articles of Organization are a tiny bit different, as well. If you are interested in forming and L3C - reach out to us.
At Enterprise Esquire, We Share Your Vision
As a nonprofit leader, active community member, and entrepreneur, I am passionate about supporting social initiatives throughout the State of Illinois. If you have an idea for a social enterprise that you would like to flesh out, click here to schedule a FREE 15-minute consultation. Our legal service packages for LLC Formation are also easily adapted for an L3C. Click here to read more about what’s included in our value-packed legal service plans.
