The Low-Profit Limited Liability Company, or L3C, is an alternative form of LLC that builds key program-related investment (PRI) requirements into the form’s charter documents. L3C statutes require, for example, that it must be organized to further a charitable or educational purpose articulated in its operating agreement. Financial returns cannot be a significant purpose of L3Cs, and they are prohibited from pursuing political or legislative purposes.
Given these restrictions, the promoters of the form hoped that investments in L3Cs would automatically qualify as PRIs, but the IRS has not issued any guidance to that effect. But even without automatic qualification, users of the form argue that it makes it easier for private foundations to conduct the due diligence necessary to complete PRIs and to comply with expenditure responsibility rules.
Term sheet language specific to L3Cs may be useful in the following situations:
- the L3C will be formed at the time of the investment, and so the charitable or educational purpose has not yet been defined;
- the investors want to modify the charitable or educational purpose in connection with the investment; or
- the investors want a voice in any future changes to the charitable or educational purpose.
- Identifying purpose with a L3C
Sample language: The [L3C state formation document] of the Company shall identify the Company’s purpose as [charitable or educational purpose definition].
- Changing purpose with a L3C
Sample language: As long as the Investors hold at least X percent of the outstanding membership interests of the Company, [the vote of at least X percent of the preferred membership interests, voting as a separate class] OR [the approval of the Board, including the approval of the Series X Manager(s)], shall be required to change the Company’s [educational or charitable] purpose(s).