Rhode Island lawmakers recently passed legislation designed to attract a broader range of investments in limited-liability companies with nonprofit missions. The measure creates a new corporate structure – the low-profit, limited-liability company, or “L3C” – with the policy goal of making Rhode Island the Silicon Valley of social ventures.
With the new law going into effect July 1, now is the time to consider whether the L3C is the right choice for your business.
An L3C is a hybrid of a for-profit and nonprofit organization and is currently available in eight other states. Like a for-profit LLC, L3C offers its owners limited personal liability for the actions and debts of the entity. It also provides management flexibility, the benefit of pass-through taxation, and is taxable like any other for-profit business.
Like a nonprofit organization, an L3C is organized to significantly further the accomplishment of one or more charitable or educational purpose. Unlike a nonprofit organization, however, an L3C is free to sell equity and memberships interests, as well as distribute profits, after taxes, to owners and investors.
The L3C structure is designed for social ventures, which attempt to confront social, economic or environmental challenges in a systemic, sustainable way. Unlike nonprofit organizations, however, social ventures do not rely on charitable donations to fund their operations. Rather, they sell equity or membership stakes through private investment capital with the goal of building self-sustaining solutions to social ills.
Social ventures generally target market and investment inefficiencies. Market inefficiencies inevitably lead to large, underserved populations here in the United States and around the globe. Social ventures can build self-sustaining business models by finding innovative ways to provide critical services to these underserved populations