NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A10060
SPONSOR: Paulin (MS) TITLE OF BILL: An act to amend the limited liability company law, in
relation to establishing the L3C act regarding low-profit limited
liability companies
PURPOSE OR GENERAL IDEA OF BILL:
To create low-profit limited liability companies.
SUMMARY OF SPECIFIC PROVISIONS:
Section 1 references the short title "L3C act".
Section 2 amends section 102 of the limited liability company (LLC) law
to provide for the creation of a new business entity, a "low- profit"
limited liability company (L3C), whose purpose is to further the accom-
plishment of one or more charitable purposes set forth within section
170(c)(2)(B) of the internal revenue code of 1986, alternatively cited
as 26 United States Code sec. 170(c)(2)(B); provided however such busi-
ness entity would not have been formed but for its relationship to the
accomplishment of charitable or education purposes. L3C entities shall
not have as a significant purpose the creation of income or appreciation
of property, and L3C entities shall not have as a purpose the accom-
plishment of one or more political or legislative purposes set forth
within section 170(c)(2)(D) of the internal revenue code of 1986.
Sections 3-6 amend sections 203, 204, 211 and 701, respectively, of the
limited liability company law to conform the new business entity to the
statutory requirements governing LLCs.
JUSTIFICATION:
There is a need for a new type of limited liability company (LLC). The
L3C is a low-profit limited liability company (LLC). L3Cs are a hybrid
legal structure combining the financial advantages of limited liability
companies (LLCs), with the social advantages of a non-profit entity. An
L3C runs like a regular business and is profitable, but its primary
focus is not to make money. The L3C's primary purpose is socially bene-
ficial aims, with profit making a secondary goal. (See
http://americansforcommunitydevelopment.org/ about.html)
L3Cs are not nonprofits; they are for-profit ventures that, under their
state charter, must have a primary goal of performing a socially benefi-
cial purpose, rather than earning money. The business entity form and
legislation were drafted with the goal of complying with federal Inter-
nal Revenue Service (IRS) regulations relevant to Program Related
Investments (PRIs) by foundations. Such compliance is anticipated to
make L3Cs useful vehicles for PRI investment - and it is hoped that such
structure and compliance might obviate the need for individual IRS
private letter rulings, although as of November 10, 2009, neither the
IRS and Congress had signed off, on L3Cs (See http://nonp rofitla w.pros
kauer.com/2009/11 /10/the-poss ibilitie s-of-the-13c/and see
http://www.wisbar.org/am/template.cfm?sectione Ne wsle ttersGrouo&
temolate=/cus tomsource/co mmunity/enews/newslet tencf in&is suem ontheW
ass ueyear=2009&gro uonamerSUSL).
It is also envisioned to facilitate trenched investing by foundations,
with a PRI taking the first risk position and thereby taking much of the
risk out of the venture for other investors in lower trenches. Under
such circumstances, the rest of the investment levels or trenches would
be more attractive to commercial investment because the PRI involvement
could improve the credit rating and lower the cost of capital.
Judging from the examples of other states that have enacted L3C legis-
lation, such entities are particularly favorable to equity investment
because the foundations can take the highest risk at little or no
return. Such trenched investing has been described as turning the
venture capital model on its head, giving many social enterprises a low
enough cost of capital that they are able to be self-sustainable.
Purpose of Low-Profit Limited Liability Companies (L3Cs).
The L3C was created by Robert Lang, CEO of the Mary Elizabeth & Gordon
B. Mannweiler Foundation, with input from tax law specialists and
members of the nonprofit sector. There are five goals underlying the
creation of L3Cs.
First, LC3s are designed to comply with IRS regulations regarding
Program Related Investments (PRIs). PRIs are IRS-sanctioned investments
made by foundations, often into for-profit business ventures; to support
charitable activities, which may involve the potential return of capital
within an established period: Assuming. the IRS confirms such compli-
ance, or such question is obviated by congressional action, foundations
can buy ownership shares, make loans to, or otherwise financially inter-
act with the L3C, using all or part of that portion of its assets that
would normally be given out annually as grants, Obviously, however, as
for-profit entities, L3Cs do not require PRIs to exist or operate.
Second, L3Cs share the operating efficiencies of a for-profit along with
a reduced regulatory structure, and the social purposes of a nonprofit
organization. As an LLC, L3Cs can bring together foundations, trusts,
endowment funds, pension funds, individuals, corporations, other for-
profits and government entities into an organization designed to achieve
social objectives while also operating according to for-profit metrics
and efficiencies.
Third, in an L3C, a foundation and/or its partner organizations can
retain ownership and management rights of the L3C, while possibly recov-
ering its/their principal investment and potentially realizing a capital
gain.
Fourth, L3Cs can facilitate tranching or layering of capital involvement
into business entities with social purposes. One of the central premises
of an L3C's operation i its use of low-cost capital in high risk
ventures and its ability to allocate risk and reward unevenly over a
number of investors, thus ensuring some investors a very safe investment
with market return, and other investors (perhaps without similar
profit-making requirements) receiving less returns and higher risk allo-
cations. As is appropriate under the PRI structure, foundations could
assume the top risk at very low return, making the rest of the invest-
ment far more secure.
Finally, the L3C entity and structure can create a desirable climate for
the investment of private capital. Because of its trenching structure,
an L3C could be partially funded - in a lowered-risk tranche -- by money
intended for prudent investments only, such as state pension funds. This
opens the door to trillions of dollars not currently available for
socially beneficial investment.
L3C legislation in other states.
There are a number of other states that have introduced and/or enacted
L3C legislation, as have the Crow Indian Nation and the Oglala Sioux
Tribe. The states introducing and/or enacting such legislation include:
Arkansas - introduced on March 9, 2009
Crow Indian Nation - enacted on January 13, 2009
Illinois - enacted on August 4, 2009
Missouri - introduced in February of 2009
Michigan - enacted on January 15, 2009
North Carolina - introduced on February 25, 2008
Oregon - introduced during 2009 regular session
Oglala Sioux Tribe - enacted on July 2, 2009
Tennessee - introduced in February of 2009
Utah - enacted on March 23,2009
Vermont - enacted on April 30, 2008
Wyoming - enacted on February 26, 2009
There are a number of other states considering L3C legislation, includ-
ing Georgia, Louisiana, and Missouri.
PRIOR LEGISLATIVE HISTORY:
2017: A.5859- Referred to Corporations, Authorities, and Commissions.
2015-16: A.1209- Referred to Corporations, Authorities, and Commissions.
Same as S.3550- Referred to Corporations, Authorities, and Commissions.
2013-14: A.6005- Referred to Corporations, Authorities, and Commissions.
Same as S.1825- Referred to Corporations, Authorities, and Commissions.
2011-12: A.6116- Referred to Corporations, Authorities, and Commissions.
Same as S.3011- Referred to Corporations, Authorities, and Commissions.
2010: A.10414- Referred to Corporations, Authorities, and Commissions.
Same as S.6726- Passed Senate.
FISCAL IMPLICATIONS:
There shall be no cost to the State or localities.
EFFECTIVE DATE:
Immediately.
