I ignited utility of social enterprise argument in this article by introducing low-profit limited liability company (L3C) in U.S. An L3C, is a new kind of limited liability company (LLC) that combines the financial advantages of the traditional LLC form of business with the social benefits of a non-profit entity. In addition, as a variety of LLC, the L3C generally shields its owners from the debts of the enterprise.
An L3C is a for-profit limited liability company which is specifically organized to further one or more charitable or educational purposes within the meaning of the Internal Revenue Code (IRC). L3Cs may be formed as free-standing businesses with social purposes. They may also be created by nonprofit organizations as for-profit subsidiaries with social welfare goals. An L3C can earn income and see its property appreciate in value, but the production of income or the appreciation of property cannot be a significant purpose of the company. In addition, L3Cs are prohibited from pursuing political or legislative purposes within the meaning of the IRC.
One major advantage of an L3C is that it is specifically designed to facilitate program-related investments (PRIs) by private foundations. Generally speaking, each year, private foundations are required under the IRC to distribute 5% of their average net assets for charitable purposes. Qualifying distributions, for this purpose, include not only grants, primarily to public charities, but also PRIs, which may be loans, loan guarantees, lines of credit, linked deposits or even equity investments. Unlike grants, PRIs can be recovered, along with earnings, and redeployed, over and over again, for charitable purposes. The PRIs ‘multiplier effect’ thus expands the foundation’s programmatic impact.
A foundation’s PRI to an L3C can catalyze a potent social-purpose strategy. By taking on higher risk and forgoing market-rate returns, the foundation affords the L3C the opportunity to attract private-sector investment which otherwise might never support a social venture. It also fosters the L3C’s long-term sustainability. Like other LLCs, an L3C is managed either by the ‘member’ or ‘members’ (owners) collectively, or by one or more ‘managers.’ The L3C's Articles of Organization must specify whether the company is to be member-managed or manager-managed. If the company is manager-managed, the managers may be members, but are not required to be. An L3C is governed according to the terms of its ‘operating agreement.’ An operating agreement is an agreement signed by the members which regulates the affairs of the company, the conduct of its business, and the relationship among the members, the managers (if any), and the company. If the company has only one member, the sole member may establish an operating agreement in writing, or, if the company has a manager other than the sole member, by oral agreement with the manager.
An L3C’s operating agreement sets forth the members’ respective rights and obligations; the contributions they are expected to make to the company; the distributions they may be entitled to receive; their voting rights; the rights and responsibilities of managers (including certain obligations which program-related investors are required by Federal law to impose on L3C managers); conditions relating to the members’ ability to transfer their membership interests; and other governance provisions.
The members are given broad latitude to determine the governance of the company by means of the operating agreement. The Limited Liability Company Act provides for “default” governance provisions, but most such provisions may be modified by the operating agreement. The operating agreement establishes substantial rights and obligations. For that reason, legal counsel should be consulted in connection with its negotiation and drafting. I believe the arguments for the U.S. L3C in the body of this work will provide a great implication to Korean legislative.