Supporting the Low-Profit Limited Liability Company

Position: Support a regulatory ruling or legislation that would recognize the low-profit limited liability company.

Position Rationale: At the request of the Council of Michigan Foundations (CMF), the Legislative Service Bureau is currently drafting an amendment to the Michigan Limited Liability Company (LLC) Act to form a new LLC called the “Low-Profit Limited Liability Company” or “L3C.” Senator Allen, Chair of the Senate Commerce Committee, will introduce the legislation this month and CMF members are standing by to provide supportive testimony.

The L3C will make it easier for foundations to invest in Michigan’s economic revitalization by allowing them access to a special LLC partnership for charitable purposes. The L3C will allow foundations to come together with other charitable organizations and private business interests to engage in charitable business practices such as job creation or affordable housing with only the incidental goal of producing a modest income or appreciation.

A foundation’s investment in an L3C would constitute a Program Related Investment (PRI) under the Internal Revenue Service Code, and therefore would not be considered business holdings or part of the foundation’s assets, but would be a qualifying distribution for the 5% minimum distribution requirement.

The ultimate goal of the legislation is to establish an L3C through state legislation that matches the federal requirements for PRIs. Montana, North Carolina and Vermont are considering adopting this legislation. If several states adopt the legislation, the IRS may consider a rulemaking change to the Code regarding Private Letter rulings for PRIs thereby removing the barriers to foundations’ charitable investments in America’s economic future.

Projects that would benefit most from the L3C structure would be community or economic development projects where for-profit investors are interested in participating. One concrete example would be an affordable housing project where the following groups work in partnership:

• a for-profit developer (i.e., the general contractor),
• a community development corporation which is a public charity nonprofit and "sponsor" of the affordable housing project,
• a bank interested in meeting its Community Reinvestment Act requirements,
• the Local Initiative Support Corporation (LISC) providing a loan to the project and
• a county or other local government agency making a grant.

The common investment vehicle used for a project like this is often a limited partnership or an LLC. The L3C would serve as a much more desirable vehicle because it would allow private foundation investment without the necessity of the foundation obtaining a private letter ruling.