L3C: A Foundation-Business Partnership to Support Nonprofits

Most foundations are required to distribute at least five percent of their assets every year for charitable purposes. While most fulfill this rule with their grants, another type of contribution also satisfies it: a PRI, or program-related investment.

A business can also make such investments, which combine two opportunities in one investment: advancing the company’s social goals while seeking a financial return. Congress has designated several hybrid structures that permit foundations and businesses to partner for program-related investing:

  • a benefit corporation
  • a B-Corp
  • an L3C, or low-profit limited liability company, which this article addresses

An attractive investment

An L3C states that its primary goal is to advance socially valuable programs, not maximize income. But by offering even limited returns alongside the opportunity to make a significant social impact, an L3C can be attractive to both foundational and private investors.

L3Cs can operate in any state, but only eleven states and two Indian tribes permit incorporation. Enabling legislation has been introduced in some two dozen other states, so L3C incorporation could soon become a wider option. The current state and tribal laws require relatively little application and reporting paperwork.

Return on investment in an L3C is limited at various caps, depending on the type of investor. The business pays no corporate income tax but is “pass-through,” meaning its individual investors pay income taxes on their returns.

L3C investments are most often made to support community development projects; other project types may require IRS approval. They can appeal to the larger foundations: in 2011 the Bill and Melinda Gates Foundation created a fund of $400 million for PRIs.

Where permitted, an L3C or another PRI structure may offer your nonprofit a relatively untapped source of fundraising.


Where are L3Cs permitted?

While L3Cs may operate in any state, they are currently allowed to incorporate in Illinois, Kansas, Louisiana, Maine, Michigan, Missouri, North Dakota, Rhode Island, Utah, Vermont, Wyoming, the Crow Indian Nation of Montana, and the Oglala Sioux Tribe.

Bills to permit LC3 incorporation are on the legislative table in 26 other state or tribal jurisdictions. The pace of this legislation through statehouses has slowed, however, since alternative PRIs were introduced, and North Carolina has repealed its law to enable L3Cs.