North Carolina Officially Abolishes L3Cs

Starting the first of this month, the state of North Carolina will no longer recognize L3C corporations as a legal structure. With little evidence of improving or growing social entrepreneurship since its enactment in 2010, there has been dwindling support for these new and improved corporations. A majority of this doubt stems still from IRS's refusal to recognize them as legitimate entities. With this large piece still missing, foundations have not hurried to fund L3C's. 

 An important part to realize from the state's decision, is that the enactment of such entities were hastily decided, with little thought into the tangible results the entities could produce. Warren Kean , a partner with K&L Gates in Charlotte and now chair of the North Carolina Bar Association’s Joint Task Force responsible for drafting the new LLC act, says ,”There was no objection on the policy side.  The objection was that this is not necessary.” That is, you can use the plain LLC for a lot of purposes and contractual arrangements. So in the interest of streamlining the act, they decided the L3C was “deadwood”, to quote Kean.

Just click here to find out more details about North Carolina's recent decision to abolish L3C's.

Check out the recent New York Times article concerning Hybrids and thier growth nationwide. As more states allow for hybrids to exist, the stakes just keep getting higher!


BUSINESS DAY
A Quest for Hybrid Companies: Part Money-Maker, Part Nonprofit
By STEPHANIE STROM (NYT)
More than 12 states have passed laws allowing companies to emphasize social benefits more than profit, bridging the gap between businesses and nonprofits.
More Articles On This Topic »

Happy Birthday to Who?

Birthdays only come around once a year, so what would be your birthday wish L3C? As you blow out the candles, we look back and reminisce.

It has been three years, since the first state in the country, Vermont, recognized low-profit limited liability company (L3C) as an official legal structure. Since April 30, 2008, nine additional states have passed legislation, including Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine, Rhode Island, Oglala Sioux Tribe, and Crow Indian Nation of Montana.

We beg the question, is this a time to really celebrate? Although several state legislations have taken the plunge, both efforts made by the Program-Related Investment Promotion Act of 2008 and Philanthropic Facilitation Act of 2010 have led to no significant federal legislation that allow L3C’s access to PRI’s and Private Letter Rulings. There has yet to be any evidence based research strengthening the L3C argument, nor a guarantee of these new social enterprises working among the current states enacting it.

To make matters worse… another social enterprise, Benefit Corporations are trailing its way into legalization. Benefit Corporations are geared towards modifying corporate law, rather than Limited Liability Companies law. Most importantly, Benefit Corporations do not have access to PRI’s, and call for complete restructuring of our economy. So far, Maryland, New Jersey, Vermont, Virginia, Hawaii and New York have all passed legislation for Benefit Corporations, and there are several states with pending legislation.

With the increase in tighter budgets, government is looking towards the for profit sector, instead of the nonprofit, to take social responsibility and serve the public. Instead of utilizing nonprofits, which have for years helped build stronger communities, they are looking towards new social enterprises which are already in need of funding to be created. Therefore, instead of saving money, our state is spending more money to jumpstart these new entities. Funneling money into these L3Cs takes a huge risk at the expense of the public taxpayers.

Throughout our country’s history, we have seen where an unrestricted capital market can create more problems than solutions. L3C’s are a prime example of what can go wrong. These social enterprises want less oversight, not more. Instead of assuming these enterprises will work, and passing legislation on them, careful and precise measures need to be taken to ensure unintended consequences do not occur.

So to you, L3C’s, is it really a Happy Birthday?