Topographic map of North Carolina

(Topographic map of North Carolina (Photo credit: Wikipedia)

Here's something the new year brought with it: As of January 1, North Carolina officially doesn't recognize the L3C, a legal structure that was given the green light in 2010.  The L3C, or low-profit limited liability company, is a for-profit business with a socially beneficial mission. (I've covered the topic before).

Part of an overall revision of the state's limited liability company (LLC) act, the law was signed by Governor Pat McCrory last June.

L3Cs, which are allowed in eight states and two federal jurisdictions--Vermont was the first to adopt the form in 2008--are largely about something called Program Related Investments (PRI). They're a type of investment that private foundations, which must use 5% of their assets every year to remain tax-exempt, are allowed to make.  Specifically, they can target enterprises with a charitable or educational purpose and that don't focus on earning profits.

Foundations haven't rushed to invest in L3Cs, however, because the IRS hasn't officially ruled on whether they're legit. As a result, the organizations risk a lot--even potentially losing their tax-exempt status.

Advocates of the L3C say foundations can avoid that fate by getting an opinion of counsel or asking the IRS for a private letter ruling. And as more foundations invest in these companies,  other investors will become interested in following suit. Critics, on the other hand, say foundations have to go through an expensive due diligence process to make sure an investment in an L3C is legit and still could lose their tax-exempt status. "It's a well-motivated attempt to facilitate a good thing," says Douglas Batey, a partner with the Seattle firm Stoel Rives. "But in practice it doesn't work."

So why did the North Carolina legislature, specifically, vote to do away with the L3C just a few years after authorizing it? Warren Kean , a partner with K&L Gates in Charlotte and now chair of the North Carolina Bar Association's Joint Task Force responsible for drafting the new LLC act, says ,"There was no objection on the policy side.  The objection was that this is not necessary." That is, you can use the plain LLC for a lot of purposes and contractual arrangements. So in the interest of streamlining the act, they decided the L3C was "deadwood", to quote Kean.

LC3 advocates say the move was part of a general right-wing trend in North Carolina politics."The problem is with North Carolina, not with social enterprise," says Robert Lang, founder of Americans for Community Development and a pioneer of the L3C.


As for the more than 100 L3Cs in North Carolina, according to Kean, they can still use the term L3C. And those companies that want the status down the road can set themselves up in one of the states allowing it. Says Marc Lane, an attorney in Chicago who is an expert on the form, "It's common for an L3C to be organized in a state that has enacted enabling legislation and then registered at home as a 'foreign entity'."

As for the people running those L3cS now, they're not sure what to do. Dena Patrick, who heads Wishadoo!, an Apex, NC company, changed her six year old firm from a plain old LLC to an L3C when the law was passed. Now, she said in an email, "As of right this minute, I have no idea which legal entity will be the best fit."