Friday, October 7, 2011

L3Cs - A Bad Idea

Low-Profit Limited Liability Companies (L3Cs)

     My objection to the L3C is based upon the fact that (a) specific enabling legislation is not required in order to achieve the purported objective and (b) the legislation, if enacted, is ultimately ineffective in achieving the purported objective.
     L3C legislation purports to make an LLC more able to receive a Program Related Investment (“PRI”) from a foundation.  PRIs are governed by Section 6694 of the Internal Revenue Code as well as a complex series of regulations and other IRS guidance related thereto.  Suffice it to say that the requirements for a valid PRI investment are intricate.  Without delving into that complexity, it is important to recognize that PRIs have existed for many years without the need of a particular enabling organizational statute in which the target of a PRI would be organized.  Put another way, PRIs have long existed without L3C legislation.
Specific LLC Enabling LLC Legislation is Not Necessary
     As noted above, various business organizations, including LLCs, have for many years been the beneficiary of PRIs, all of which has been accomplished without L3C-specific legislation.  Not only is it possible to organize a limited liability company that contains all of the language that would be included consequent to the enactment of L3C legislation, such has been done.  Previously I filed the Articles of Organization of “L3C, LLC,” a limited liability company organized in Kentucky.  Those articles contain everything that would be required by the L3C legislation.  Clearly the enactment of L3C legislation is unnecessary.
L3C Legislation Does Not Further the Receipt of a PRI
     Notwithstanding the representations of certain L3C promoters, having been organized under L3C enabling legislation does not further the ability of a particular venture to receive a PRI.  A valid PRI is dependent upon a significant number of factors including (i) the purpose of the foundation desiring to make the PRI, (ii) the purpose of the PRI recipient, and (iii) the specific terms of the PRI including what return may be recognized by the foundation and from what source that return will come.  These crucial aspects of a valid PRI are in no manner furthered by L3C legislation.  Hence, the suggestion that organization under an L3C statute facilitates receipt of a PRI is simply inaccurate.
The Views of the IRS, the Regulatory Community, the Foundation Community and the ABA Committee on LLCs
     The IRS has not indicated that L3C legislation will in any manner facilitate the issuance of a private letter ruling or other guidance endorsing a particular PRI structure.  At the same time, efforts by certain of the L3C promoters to enact legislation amending the Internal Revenue Code to achieve that result have been rejected.
     An article by David E. Spenard of the Kentucky Attorney General’s Office titled Panacea or Problem:  A Statue Regulator’s Perspective on the L3C Model, published in the February 2010 issue of The Exempt Organization Tax Review, reviews, from the regulator’s perspective, many of the problems presented by the L3C.  In an article titled L3Cs:  Less Than Meets the Eye, published in the May/June issue of Taxation of Exempts, David Chernoff, Associate General Counsel of the MacArthur Foundation, responded to a series of six myths regarding PRIs and L3Cs.  Therein he debunks a number of statements made with respect to L3Cs, including that L3Cs are necessary before a PRI may be made into an LLC and that the L3C structure results in less costs in the making of a PRI.  Numerous other authors have weighed in on the debate and found the L3C concept to be ineffective.
     Last, consider a Resolution of the Committee on Limited Liability Companies, Partnerships and Unincorporated Entities, Section of Business Law of the American Bar Association, approved at its April, 2010 meeting.  By this Resolution, the body of the American Bar Association charged with LLCs determined that L3C legislation is not appropriate, and on that basis stated that it:
formally opposes the incorporation into existing limited liability company acts of low-profit limited liability company (‘L3C’) amendments and respectively urges all state legislators not to adopt L3C legislation.
If someone can demonstrate to me that L3C amendments to the Kentucky (or any) LLC Act will facilitate a transaction that the current act cannot accommodate, I’m happy to listen.  Until, however, you show me the need for a new tool. I’m not going to further clutter up my tool box.

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