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Nonprofit Law updates from Cullinane Law Group. October 2013.
Cullinane Law Group

What is this new L3C? (low-profit limited liability company)

Social entrepreneurs have a number of choices when it comes to selecting the best business organization structure to achieve their socially conscious mission.

Initially, social entrepreneurs usually consider whether to be nonprofit or “for profit.”

  • NonprofitTax exempt nonprofit corporations provide tax benefits to both the organization and donors, but can pose challenges to entrepreneurs looking to make profits and encourage private investment.
  • For-profit with a social purpose: The social entrepreneur looking to start a for-profit corporation with a social purpose can consider Benefit corporations and B Corps and a little known business organizations called an L3C.

L3C: a new form of limited liability company

The L3C is a hybrid of a “for profit” and nonprofit organization, and has characteristics of each.

  • As with a nonprofit, an L3C must be formed in furtherance of some charitable or educational purpose or mission.
  • However, as with a for profit entity, an L3C may have equity owners who have the right to receive distributions of profits and appreciation in the value of the business entity.
  • While the entity functions similar to a traditional limited liability company, an L3C is required to carry on a business that has a charitable purpose, but is allowed to generate modest profits from its business.

Funding

L3Cs can take advantage of both traditional funding through debt and equity financing as well as generating funding from private charitable foundations.

  • For-profit business organizations, community foundations, private foundations, public charities, governments, and individuals interested in promoting community development and revitalization are all candidates to invest in an L3C.
  • In turn, private charitable foundations such as family foundations and community foundations can invest money into qualified L3Cs and can likely claim the investment as program related investment (“PRI”).

Taxes

L3Cs cannot qualify as a tax-exempt organization under 501(c)(3) of the Internal Revenue Code unless it meets certain criteria. To be tax-exempt, all of its members must themselves be tax-exempt organizations, and the IRS has established 11 other criteria to qualify for federal tax exemption. While it may be appropriate for certain L3Cs to seek tax-exempt status, assuming they meet the criteria established by the IRS, most L3Cs are expected to be for profit entities that must pay taxes on income.

State Business Structures

State legislatures are encouraging investment in social entrepreneurs by recognizing L3Cs as distinct business organizations. As of August 2013 L3Cs are recognized business organizations under state law in the following states: Vermont, Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine, Rhode Island.

Of course social entrepreneurs located in other states without L3C legislation can form their L3C in one of the states that do allow for that business organization and then register the L3C as a foreign LLC doing business in their state.


photo of Mollie Cullinane
Mollie Cullinane
 

We work exclusively with nonprofits + social enterprises.

We help you turn your passion or cause into an organization that can make a difference.


We serve foundations, charities, professional athletes, religious organizations, social enterprises, and do-gooders throughout the United States who seek to create positive change.


Based in Austin, Texas.
Clients Nationwide.

512.298.2898
hello@cullinanelaw.com


Jeff Cullinane

Social Enterprise Highlight: Empowerment Plan

The Empowerment Plan is a Detroit-based nonprofit organization dedicated to serving the homeless community. They hire homeless women from local shelters to become full time seamstresses. These women manufacture a coat that transforms into a sleeping bag, which is then given out to homeless individuals living on the streets at no cost to them.

The organization and its founder Veronika Scott have garnered a great deal of attention over their successful social enterprise model.  
Scott, 23, has been profiled on CNN, NPR and the Discovery Channel and featured in Forbes, The New York Times and The London Daily Mail. She is a recipient of the 2012 John F. Kennedy New Frontier Award—an award honoring individuals under 40 who inspire a new generation of public servants.


Veronika Scott will be speaking about this social enterprise at Texas Lutheran University in Seguin on November 6 at 7:30 p.m. as a part of Krost Symposium. Give us a call and we can give you more details about getting tickets to the lecture. 

Huffington Post: Better Way to Help the Homeless

Charity Raffles

Each state has various requirements for holding raffles. In Texas, the Charitable Raffle Enabling Act outlines the guidelines nonprofits must follow to legally hold a raffle. There are standards for types of prizes, limits on value of prizes, information that needs to be printed on tickets, and how tickets can be sold and advertised. 

Texas allows the following types of nonprofits to hold raffles: 

  • A nonprofit association organized primarily for religious purposes that has been in existence in Texas for at least 10 years;
  • A nonprofit volunteer emergency medical service that does not pay its members other than nominal compensation;
  • A nonprofit volunteer fire department that operates fire-fighting equipment, provides fire-fighting services, and does not pay its members other than nominal compensation; 
  • A nonprofit organization that has existed for at least three preceding years and is exempt from federal income tax under IRC Section 501(c); does not distribute any of its income to its members, officers or governing body; does not devote a substantial part of its activities to attempting to influence legislation; and does not participate in any political campaign.

Learn How to Hold a Raffle

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