This is the situation we have at hand: in the US, you can no longer register a low-profit limited liability company (L3C), known as the legal structure for “hybrid” businesses or social enterprise, in the state of North Carolina.
It was chopped after being implemented for three years because critics didn’t see the need for the L3C, which was supposed to help companies attract program-related investments (PRIs) from private foundations but does not because of confusing tax rules.
Those who want the L3C gone, mainly business lawyers, say that North Carolina’s move was a step in the right direction and believe we could see more states follow suit. However, others argue that all it needs is more regulation and oversight to take off, pointing to the UK’s example of the community interest company (CIC).
The CIC, similar to the L3C, is a legal structure intended for social enterprises. There is a significant amount of supervision on and requirements for CICs such as the need to create an asset lock which would protect company assets for socially beneficial uses, and the need to limit shareholder payout.
It’s evident that CICs purposefully invest in communities rather than stuff shareholder pockets. So the UK government, wanting to support these companies the same way it does with startups, announced this month a 30 percent tax relief for CIC investors.
The rules are clear in the UK: if you’re a CIC, or charity or “community benefit society” for that matter, your investors qualify for the tax relief. But in the US, if you’re an L3C, your investors may not always be eligible to make a PRI. The onus is on the foundation to figure out if the investment advances its cause because it must, and there is no rule that says all investments made by foundations to L3Cs qualify as PRIs.
While it remains to be seen how investors react to the Social Investment Tax Relief and how it will affect CICs, the simple design, clarity, and definitions has brought CICs to a new stage some call “groundbreaking”, leaving many to wonder what will become of the L3C.
