The Low-Profit Limited Liability Company (l3c) in Visual Arts.

When the Twain meets, Another Way to Develop Art: The Low-Profit Limited Liability Company (L3C) in Visual Arts.

Jingyin/Seline Chen

Environment of Visual Arts Administration

Professor Sandra Lang

16th December, 2014

What is Low-Profit Limited Liability Company (L3C)

Low-Profit Limited Liability Company (L3C) is a new hybrid business entity, a for-profit venture with the nonprofit soul. Ideally, it operates in the space between pure for-profit entity and nonprofit organization. It is designed to attract both socially motivated and profit-oriented investments to serve a social benefit. The L3C has a primary goal of performing a socially beneficial mission and a secondary profit concern, which means, unlike a nonprofit, the L3C is free to distribute the profits after taxes to owners or investors. The L3C legislation was created to respond IRS regulations about PRIs (Program Related Investments) by foundations. It is built on the LLC structure in order to become flexible for membership and organization to cover various socially beneficial fields, including the visual art world.

The L3C and the Limited Liability Company (LLC)

The L3c adopts the existing LLC framework in the states. It is not a new corporate structure. Like an LLC, it has the liability protection of a corporation and the flexibility of a partnership: members can have management responsibilities and voting rights; make investments and receive investment income. Also, it is taxed on its profits. But unlike an LLC, the L3C can further one or more charitable or educational purposes defined by the reference of the IRS. And its ability to structure layered investments attracts larger market driven investors who are not typically associated with charitable investments to increase the pool of resources to serve the socially beneficial mission.

The L3C and the Program Related Investment (PRI)

PRI is the investment made by private foundations to put at least 5% of their annual assets for charitable purposes, in which making profits is not significant. It can be a loan or an equity investment provided at favorable rates to support socially beneficial activities, such as an exhibition project for arts students or an educational project to promote arts in the community. It has the potential of regaining the investments plus a reasonable rate of return rather than simply giving away money through grants. PRI allows foundations to increase the amount of money available to the social sector, while simultaneously building stronger and more sustainable socially beneficial organizations. In addition, PRI is exempted from, first, the excess business holdings tax, which is generally imposed for investments with more than a 20 percent interest in for-profit ventures and second, the jeopardizing investment tax, generally imposed for investments that financially endanger the charitable work of the foundation. It has been in existence since the Tax Reform Act of 1969. Despite this, PRI has been underutilized because it is perceived as too risky, costly and burdensome. The L3C is established to provide a platform for the PRI by encouraging private investment in social enterprise organizations. This is done through a layered (tranche) investment structure.