New State L3C Legislation Creates Tool for Economic Revitalization

by Mike Gallagher for the CMF NewsWire
Posted: 2/6/2009

A new state law allowing the creation of Low-profit Limited Liability Companies (L3Cs) is being acknowledged by state legislators, corporate leaders and nonprofit officials as an important new tool that makes it easier for foundations to invest in Michigan’s economic revitalization.

The passage of the legislation – signed into law by Gov. Jennifer Granholm on January 15 – “is a testament to the perseverance, drive and dedication of the Council of Michigan Foundations (CMF),” according to Robert M. Lang, Jr., president and CEO of the Connecticut-based Mary Elizabeth & Gordon Mannweiler Foundation and the creator of the L3C model.

Lang created the L3C concept and legal language – with the help of Washington D.C. attorney Marcus Owens from the firm Caplan & Drysdale – to help a Connecticut city obtain an empty, but historically significant department store building and transform it into a needed convention center.

Today, only Michigan and Vermont have legally adopted L3Cs as law, as well as the Crow (Indian) Nation. Other states introducing similar legislation, said Lang, are North Carolina, Montana and Wyoming and proposed laws are now being written in Illinois, Oregon and Washington. Plans are underway to eventually have it adopted in all 50 states and with all Indian tribes.

Lang, along with Robert Collier, CMF president and CEO, and Steve Gunderson, president and CEO of the Council on Foundations, are working with congressional leaders to get a federal L3C bill introduced.

Owens said he met with the Senate Finance Committee and Congress’ Joint Committee on Taxation and that “so far they say they have no objections.”

CMF’s Board of Trustees made the passage of Michigan’s L3C law a legislative goal and Collier said the real thanks for its successful shepherding through the state legislature goes to State Senator Jason Allen (R-37th District), chair of the Senate Commerce Committee, who first introduced the bill on July 24, 2008, and to Speaker of the House Andy Dillon (D-17th District) who ensured the bill was acted on by the House in the Lame Duck Session in December.

“Thanks to them we now have a vehicle in which foundations and for-profit enterprises can partner to help spur Michigan’s economy,” added Collier.

“Gov. Granholm also should be thanked for her support and dedication in signing this new law…and recognizing its importance in helping the nonprofit sector find yet another way to join in this important effort to transform Michigan and help it through these trying economic times.”

What Is An L3C?

An L3C is a type of Limited Liability Company (LLC) that allows a partnership of nonprofit and for-profit businesses to engage in socially beneficial activities.

The L3C’s unique structure allows foundations to invest by using an alternative to grants called program-related investments (PRIs) – a loan, loan guarantee, equity purchase or other investment that will further the foundation’s philanthropic purposes.

Before the new law, many foundations shied away from investing in for-profit ventures through PRIs because of burdensome and costly IRS requirements to verify and qualify those types of investments. PRIs are legally complex and expensive for foundations to administer. To date, only about 5% of all foundations have used PRIs nationally, according to the Foundation Center.

But now L3Cs eliminate most of those requirements.

An L3C can have different classes of investors – such as individuals, government agencies, nonprofits and for-profits – with foundations taking the most risk. The L3C’s investment structure is designed to bring new pools of funds, such as pension and endowment investments, to bear on problems normally treatable only by nonprofit dollars.

Because it is now a defined entity under Michigan law, an L3C also virtually eliminates legal fees and organizational costs associated with PRIs. It allows the use of the more efficient free enterprise system unburdened by nonprofit regulation, said Lang.

Foundations participating in an L3C can realize some significant benefits, according to Michigan tax officials.

For example, foundations are required to pay out annually at least 5% of their assets as grants to nonprofits. With an L3C, through PRIs they can now make investments in both for-profit and nonprofit ventures and have those funds count toward their required payouts.

“The L3C results in much lower transactional costs and allows the foundation to satisfy its philanthropic mandate and possibly generate a modest return, while drawing additional investors to the entity,” said Owens.

“What the L3C does is provide a legal structure that facilitates foundations using their endowment funds for socially beneficial purposes such as economic development in areas that are economically distressed,” noted Owens.

“Foundations can now leverage their resources to enable entrepreneurs who have ideas on how to help the economy and deal with problematic social issues access capital at better rates from banks and other lending institutions,” he added. “The L3C can even help eliminate financing costs altogether.”

In addition to their efforts to secure federal legislation, Collier, Lang and Gunderson are also working on persuading the IRS to issue a private letter ruling on L3Cs that would qualify them to use PRIs anywhere in the nation with the tax benefits that Michigan and Vermont now enjoy.

In Vermont about 35 L3C entities have been created or are in the process of being created so far.

The issues and programs being addressed , include: carbon trading, alternative energy, food bank processing, social services, social benefit consulting and media, arts funding, job creation programs, economic development, housing for low income and aging populations, medical facilities, environmental remediation and medical research.

“It’s too early to tell at this time just how successful these (L3C) ventures are because they’re so new, but we are keeping track of them and will report on them in the future,” said Vermont Attorney General William H. Sorrell.

David O. Egner, president and CEO of the Hudson-Webber Foundation, a CMF trustee, co-chair of CMF’s Public Policy Committee and a member of CMF’s Government Relations Committee, said he is excited about the possibilities that the new L3C law brings to Michigan.

“This is a powerful new tool that foundations can use in partnership with for-profits to help address many economic and social issues facing our state today,” said Egner. “I’m proud of CMF’s role in having helped move this legislation through.”

To educate Michigan foundation leaders about the new L3C law and how it can benefit them, CMF will host a members-only Webinar featuring attorney Marcus Owens on February 17 from 11 a.m. to noon at no cost. Online registration is available at michiganfoundations.org.