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Welcome to NoToL3C.org, the web’s only portal devoted exclusively to information, articles & blog posts for visitors seeking or wanting to contribute to a critical perspective of the organized drive to create L3C corporations.

In New York State, as well as many other states across the country, legislative advocacy is taking place to legally recognize low-profit limited liability companies, or L3C’s.  These exotic legal contrivances or “hybrids” are supposed to   carry out charitable or socially responsible purposes while intentionally not making too much money.  Some states have already passed laws recognizing the L3C contraption.  This means that they can already operate in any state in the nation, yet the advocates are still pushing for legislation in additional states.

If this all sounds odd to you, it does so because it is odd.   You may be asking why we need to spend taxpayer dollars for new laws in order to allow a for-profit venture to do something good.  The answer is that we don’t. 

 Indeed, sole proprietors or LLCs right now can engage in a commercial enterprise that is socially responsible and deliberately limit their profit?  Charitable 501c3 organizations are free to engage in mission- related activities that generate revenue as long as it does not do so for private inurement  interests.   
 
Charities are also allowed to engage in activities that generate unrelated business income or own a for-profit business - provided they pay taxes on the net income.  And, LLC corporations can currently be structured to receive Program Related Investments (PRIs) from foundations, which is the primary design feature of and the real motivation behind the drive to create L3C’s.

The goodness of the individual entrepreneur’s heart aside, this is really about a business model where entrepreneurs and investors gain greater leveraged access to (or perhaps “raid”) charitable assets through Program Related Investments (PRI’s)  while minimizing their own financial risks by shifting those risks to charitable sources  and avoiding the accountability and transparency that the public has demanded of charities.   

Why keep do the advocates keep pushing state-by-state legislation you may ask.  It is because such recognition fosters the “legitimacy” of these entities and may help in securing an expedited private letter ruling from the IRS.

The truth of the matter is that the L3C advocacy movement is one of smoke and mirrors.  NoToL3C.org is an effort to cut through the propaganda that is being distributed and the blurriness that is being created.   Quite frankly, we are not interested in duplicating or repeating the information and opinions that the well-organized L3C movement has created, so if you are looking for that information, there are plenty of other sources elsewhere for you to go.        

NY Nonprofit Press: L3Cs: Trying to Play Both Ends Against the Middle

L3Cs: Trying to Play Both Ends Against the Middle

Author: Doug Sauer, CEO, NYCON Originally Published in the New York Nonprofit Press Monday, 29 November 2010  Charities rely tremendously on our socially- and community-minded for-profit supporters. They assist us in our work through cash and in-kind contributions, sponsorships, board leadership, influence, business guidance, paying taxes, and the list goes on. Businesses exist, however, to make money and they can do so in socially responsible ways if they choose. Unlike for-profits, charities exist for a specific, government approved public purpose.  As such, we face ever increasing regulatory standards for accountability and transparency designed to demonstrate that our organizations and the individuals involved are not gaining private inurnment. Why this basic primer on the difference between for-profits and nonprofits? Well, there is a recent national craze that seeks to create a “fourth sector” made up of Low-Profit, Limited Liability Companies (L3Cs) that are legally for-profit businesses, but which are supposed to put their primary focus on social good rather than profit.  This movement is both misguided and potentially dangerous.  Vermont was the first state to enact legislation in 2008 establishing L3Cs as a legal business entity.   Since then Michigan, Wyoming, Utah and Illinois have followed suit, along with the Crow Indian Nation and the Oglala Sioux Tribe.  Several other states are considering similar proposals. Earlier this year, the New York Council of Nonprofits (NYCON) was surprised to see an L3C bill authored by Senator William T. Stachowski (D-Buffalo), suddenly advance out of its original committee of jurisdiction and proceed through several legislative steps before being passed by a vote of 50-11 on the Senate floor – amazingly, all on the same day.  A companion bill AB-10414 introduced by Assemblyman Richard L. Brodsky (D-Westchester) remained under consideration in the Assembly Committee on Corporations, Authorities and Commissions.  With the current legislative session at an end and their sponsors leaving office, these bills appear to be dead, at least for the moment. We at NYCON believe that is a good outcome and we are hopeful that there will be no effort to re-introduce L3C legislation for New York in the future.  Here’s why: Supporters argue that L3Cs innovatively combine the best of both the for-profit and nonprofit worlds.  Since they may legally generate a profit – albeit a yet to be defined “low profit” – L3Cs supposedly are capable of attracting new private sector capital in support of ventures with a broader social purpose.  Supporters also hope that the IRS will change regulations to allow L3Cs to receive Program-Related Investments (PRIs) from private foundations.  Those investments currently are not automatically eligible for inclusion as part of the grants to charities that foundations must make in order to meet their own IRS requirements.  I am sure that the core thinkers and entrepreneurs behind the L3C movement are sincere folks who seek improvements in our society.  That said, supporters fundamentally seek three things that are unacceptable to NYCON and many in the nonprofit sector: 1.  Access to private foundation dollars for risk leveraging purposes.  There are two problems with this.  The funding which L3Cs seek comes from resources that would otherwise be available to the good work and achievements of legitimate charities.  Secondly, the scheme put forth is that the L3Cs will be take in investments in separate “tranches”, or layers, each with its own level of securitization and risk.  Foundation PRI’s, they maintain, would be most helpful in providing the early-round and highest risk financing, thereby attracting for-profit, private sector investors during subsequent rounds when the risk is lower and chances of a return are greater.   NYCON believes that any investment model where funds from foundations take on the highest risk in order to protect private investors is totally inappropriate.  It goes against the traditional fiduciary responsibility which boards of directors, officers and fund managers of foundations have to safeguard their charitable assets.  Since the L3C is a private business, the entrepreneur owners themselves do not have any fiduciary responsibility and, moreover, are personally protected by being in a limited liability corporation. 2. Avoidance from the charitable regulatory and accountability environment.  The L3C model is an effort to find a legal and tax “space” with the least amount of public oversight and scrutiny possible. L3C entrepreneurs are accountable first and foremost to their investors and certainly don’t want to be restricted by the federal and state governance, financial, and compensation reporting and rules that charities live by.  This accountability to investors who expect a financial return as opposed to donors who solely expect mission return and regulators who are working to protect the public’s interest is a fundamental and fatal flaw in the L3C model.   Many of the contemporary regulations concerning nonprofits are due to private inurnment abuse and are critical to maintaining public trust.  Currently, a number of State agencies such as the Offices of Mental Health (OMH) and People with Developmental Disabilities (OPWDD) are working hard to prevent such excessive executive compensation through regulation and auditing.  Limited liability companies (LLCs) in New York are not required to have Boards of Directors or to make any kind of public disclosure of their organizing documents.  Without these and other requirements, there is a high risk that L3Cs will be fertile ground for excessive executive compensation and conflicts of interest, something which is prohibited by the Internal Revenue Code and regulated in charities by the IRS.   3.  Intentional “blurring” of the charitable definition and marketplace .   The public doesn’t understand the workings of C3’s much less that of an exotic, legal contrivance that is similar in name (L3C) and purports to not be what it appears.  Charities are working hard and continually to build the confidence of donors, organized philanthropy, consumers and the public at a time there is growing anger and distrust in the integrity of corporate and government institutions.  Creating a so-called fourth sector that relies on blurring, legally and in brand, the historic line separating for-profit from charitable organizations is a dangerous long term threat to the sector and public good will.  Concern with L3C’s is growing.  The New York Times recently explored examples of potential conflicts-of-interest at existing L3Cs in other states. (“Hybrid Model for Nonprofits Hits Snags”, October 26, 2010.)   Daniel Klienberger, a Law Professor at Mitchell College of Law in St. Paul, MN, has also outlined an extensive series of legal concerns. (“The Fatal Design Defects of L3Cs”, Nonprofit Quarterly, June 21, 2010). The creation of these entities in New York State will create a regulatory nightmare as there is no regulatory framework for them to operate within at the state or federal level.  The Internal Revenue Service has yet to rule on whether PRIs in L3Cs would be viewed as a legitimate use of charitable funds under legal guidelines established for private foundations.  Until such a ruling, any legislative action to establish L3Cs clearly would be premature. Current IRS and State regulations provide ample opportunities for charities to responsibly engage in revenue and mission generating enterprises.  NYCON itself is the sole shareholder of a successful for-profit insurance brokerage firm that has served and benefited the charitable sector for a dozen years.  NYCON is fully confident that the legislation passed by the NYS Senate and introduced in  the Assembly was intended to promote charitable causes and support the wide range of critically important work that nonprofits perform.  Unfortunately, we believe that the passage of legislation creating L3Cs as a legal entity in New York was ill advised and would have precisely the opposite effect. Doug Sauer is CEO of the New York Council of Nonprofits (NYCON).

Stanford Social Innovative Review: “L3C” Spells “Caveat Emptor”

“L3C” Spells “Caveat Emptor”
From the Stanford Social Innovative Review. Read the full article here.

Here’s something strange: a concept thrown around routinely and casually in conversations among nonprofits and philanthropies is simultaneously the subject of fierce debate and sometime disapproval by the Internal Revenue Service, a committee of the American Bar Association, and other experts. What is going on?

The notion of Low Profit Limited Liability Corporations (L3Cs, for short) is that they’re a vehicle for doing well by doing good and therefore an improvement over the typical nonprofit structure. L3Cs are permitted to earn profits, but proponents claim that their praiseworthy intentions—to end hunger or provide clean water or whatever—make those who lend to them eligible for the special tax benefits attached to program-related investments. In other words, this is a legal structure presented as a technique for gaining access to capital (always a struggle for nonprofits) by providing a tax benefit to lenders.

Of course, foundations already get a tax benefit for program-related investments in regular nonprofits, so what, exactly, is the appeal? In theory, foundations might be more interested in program-related investments that generate a reliable flow of capital (in the form of profit) than in program-related investments that generate nothing but additional nonprofit programs and services. Likewise in theory, regular venture capitalists outside of foundations will be more interested in making investments in profit-making entities than in pure nonprofits. This—the notion goes—will increase the amount of capital available to support general good-guy behavior.

Read the full article here.

American Bar Association: L3Cs: Useless Gadgets?

American Bar Association: L3Cs: Useless Gadgets?

Business Law Today

Volume 19, Number 2 November/December 2009 
Click here for the full article

When I was a kid, I had a knife with many tools, and I used it frequently and for all kinds of tasks. It had a large blade, a small blade, several screwdrivers, tweezers, a can opener, a bottle opener, scissors, and other devices. It also had something that was marketed as a fishhook remover and fish scaler. I took it fishing, and even tried the hook remover and scaler—they were pretty much useless. I think of such a knife as very useful, adaptable for many purposes, with a few useless gadgets tossed in so that it can be promoted as a tool that does nearly everything one can want.


Limited liability companies are the multipurpose knives of the business organization world. They can be used well for many different tasks. It is this multiplicity of uses, all within one statutory form, that gives LLCs their value and their allure.


One trick with LLCs is to keep from burdening them with useless gadgets. Inclusion of such gadgets is dangerous since some people will attempt to use them, creating risk that should not be created. The well-advised will just use the good tools, and stay away from the gadgets. When my combination hook remover/fish scaler did not work, I folded it back into the knife's body and used a regular scaler. If an LLC gadget does not work, there will be costs incurred by those who attempt to use it to solve a real problem.


Low-profit limited liability companies (L3Cs), adopted in six states with numerous other states considering adoption, are, in the author's view, dangerous gadgets. They add nothing to the LLC package, and might give the unsuspecting user the unfounded belief that difficult tax problems have been solved. Before discussing the risk posed, this article will discuss concepts underlying L3Cs generally.  Click here for the full article

The L3C: Innovation or Gimmick?

The L3C: Innovation or Gimmick?

Originally Published on "State of the Art" Blog by James Undercofler, Professor of Arts Administration in Drexel University's Westphal College of Media Arts and Design

There's a lot of talk in the NFP arts and culture worlds about this new hybrid organizational model, the L3C. First, here is a brave attempt at a definition of it. Quoting and paraphrasing Emily Chan of the Nonprofit Law Blog:

"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization.  More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designated to provide a social benefit.  Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern.  But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.

"A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation's mission. Additionally, the fiduciary responsibilities of for-profit partners often prevent their participation in a foundation PRI in a for-profit venture.  The L3C avoids this common problem through its flexible membership rules which allow partners to structure the L3C and adjust ownership to best fit their unique situations.  By addressing these current investment challenges to PRIs, L3Cs are able to attract a greater influx of private capital from various sources of wealth in order to serve their charitable or education goals."


From what I can find, the L3C has been utilized primarily so far for projects in social entrepreneurship.  There's an online article in CNN Money that describes such a project (http://money.cnn.com/2010/02/08/smallbusiness/l3c_low_profit_companies/).

PRIs can be made in the form of loans, equity investments, bank deposits and guarantees.  Like traditional grants, PRIs are used to support charitable organizations or to commercial ventures that fulfill a charitable purpose.  But unlike grants, PRIs are designed to be repaid, usually along with a modest amount of interest or other type of financial return. 

To be honest, the L3C leaves me scratching my head.  Does it have potential use in the arts and culture sectors, or conversely does it provide an avenue for foundations to give to quasi-commercial ventures in lieu of giving to arts and culture?  The two uses in the arts that I can imagine are: one, building projects in "challenged" neighborhoods where a case could be made that the gallery or theater would change the economic dynamics to the positive; and two, pre-commercial-run theatrical productions that have a chance of commercial success, but within that success gives a designated portion of its profits to a social cause.  There are surely other applications for others to construct.

The hopeful aspect in the creation of the L3C is that it's the first real diversion from the traditional 501(3)c model to come along.  Its creator (s) saw a need, and rather than forcing it through the traditional model, they created a new one to move forward.  Now let's hope that other hybrids, or altogether new models are on the horizon. 

Vermont Law Review: The L3C Illusion: Why Low Profit Limited Liability Companies will not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial Ventures

L3C ILLUSION: WHY LOW-PROFIT LIMITED LIABILITY COMPANIES WILL NOT STIMULATE SOCIALLY OPTIMAL PRIVATE FOUNDATION INVESTMENT IN ENTREPRENEURIAL VENTURES

J. William Callison & Allan W. Vestal Vermont Law Review Vol. 35:273
CLICK HERE FOR FULL ENTRY

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