L3C is short for a Low-profit Limited Liability Company, one of two types of legal business entities recognized for their purpose of achieving social benefit. The other type is called a Benefit Corporation, often referred to as a B Corporation or B-Corp for short. The concept of the social benefit business entity structure evolved over the past decade or so as way to bridge the gap between non-profit and for profit companies and investments.
By creating a structure that more readily permits investments to be beneficial AND for-profit, legislators and proponents view L3Cs and B-Corps as a way for investors to both ‘do good’ and do well at the same time. In particular, company directors and executives are clearly allowed, and in fact required, to make decisions and take action based on what is best for achieving their organization’s specific social benefit without liability to shareholders that might arise from the mandate and legal fiduciary responsibility to ‘maximize shareholder value’ in the standard for-profit business environment.
Various, but not all, states permit the formation of either one or the other type (but so far none that recognize both). Whether a B-Corp or L3C, all states require that the entity contain in its company formation or incorporation documents some wording similar to the following:
“The ____ (L3C or B-Corp) must be organized and operated at all times to satisfy the following requirements: The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s), and;
- No significant purpose of the company is the production of income or the appreciation of property (though the company is permitted to earn a profit), and;
- The company must not be organized “to accomplish any political or legislative purposes.”
The primary consideration when organizing, managing and operating an L3C or B-Corp is that the benefit must be achieved ahead of profit motives. As long as the benefit is achieved the organization may engage in any legal business activity, and in all other respects the company reports and pays taxes on profits like any other for-profit entity.