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Editorial 12 MIN READ

The L3C at thirteen: is it dead yet

Twenty months after our post-mortem, the map is still frozen, the benefit corporation is printing IPO covers, and a new federal filing is about to land on every L3C that survives

The Editors
Staff, Incorporator.org
12 min read Updated
Contents 7 sections
  1. The state map has not moved
  2. TD 9762, five and a half years on
  3. The Corporate Transparency Act lands on every L3C
  4. The benefit corporation is printing IPO covers
  5. Three narrow lanes are now two
  6. What a 2021 founder should actually do
  7. Sources

hirteen years after Vermont wrote Act 106, the low-profit limited liability company is still on the books in ten states, still picking up a few hundred filings a year between Illinois, Wyoming, and Michigan, and still unable to name a single thing it does better than a plain LLC with a careful operating agreement. The L3C is not dead. It is a form that keeps not dying, which is a different condition.

Twenty months ago we wrote the twelve-year post-mortem, and nothing that has happened since has rehabilitated the form. The July 2018 revisit and the November 2016 original walked through the mechanics in detail; the arc since is the continued absence of the federal validation the form was designed around, and the continued arrival of the benefit corporation in places the L3C never got. What has happened in 2021 is that a new federal filing obligation, signed into law over a presidential veto on January 1, is about to attach to every reporting company in the country, and the L3C sits squarely inside it.

The state map has not moved

Rhode Island's 2012 enactment is still the last L3C adoption in a United States jurisdiction. The list as of November 2021 is Vermont, Michigan, Wyoming, Utah, Illinois, Louisiana, Maine, Rhode Island, North Dakota, and Kansas, with Missouri retaining L3C provisions in Chapter 347 of its Revised Statutes and Puerto Rico and the Crow and Oglala Sioux tribal jurisdictions rounding out the list. That list has been stable since Kansas completed its adoption cycle, and no state legislature has reported an L3C bill out of committee in 2019, 2020, or the 2021 sessions that have adjourned so far.

North Carolina remains the only outright repeal. Chapter 57D of the North Carolina General Statutes, which replaced the L3C-authorizing Chapter 57C effective January 1, 2014, is in its eighth year without the designation and without any legislative effort to restore it. The North Carolina Bar Association's drafting commentary has aged well: a properly drafted plain LLC does anything an L3C can do, the federal tax baggage is worse than the signaling benefit, and no bar committee has produced a memo arguing the other way.

The census, as InterSector Partners keeps counting it, sits at roughly 1,800 active L3Cs across all jurisdictions in late 2021, up from roughly 1,700 in early 2020, with Illinois and Wyoming continuing to produce most of the net growth. That is a growth rate in the low single digits, against a backdrop where the national LLC population grew by millions over the same period. The form is adding members at about the rate at which it is aging out of practitioners' memory.

Vermont's own count, per the Secretary of State's business inquiry system, has stayed essentially flat since 2015. The state that invented the form is no longer a net formation destination for it. Michigan's count continues to creep, which reflects the presence of two or three foundations with in-state impact-investing programs that still ask for L3Cs by name. Outside those pockets the form is a curiosity.

TD 9762, five and a half years on

The regulation that was supposed to be the L3C's vindication turned thirteen examples old this April. TD 9762, "Examples of Program-Related Investments," 81 Fed. Reg. 24014 (April 25, 2016), finalized nine new examples at Treas. Reg. § 53.4944-3(b), numbered 11 through 19, across a deliberately broad set of fact patterns: a recoverable grant to a non-United-States subsidiary pursuing public health, an equity investment in a for-profit educational business, a high-interest loan to a food-cooperative startup, a subordinated loan to a disaster- recovery company, and a guaranty for bank financing to a small subsidiary of a community-development corporation. Every example uses generic "Corporation" and "LLC" labels. None uses "L3C."

The practical meaning of those examples, five and a half years in, is now visible in the private letter rulings and the foundation diligence templates that were updated in their wake. Philanthropy counsel at large law firms rebuilt their PRI checklists against Examples 11 through 19 through 2016 and 2017 and have not substantially revised those checklists since. The private letter rulings the Service has issued on novel PRI structures in 2018, 2019, 2020, and 2021 have turned on the economic terms of the deal and the charitable purpose language in the operating documents. None has treated L3C status as probative of PRI qualification. The Council on Foundations' reading from April 2016, that the expanded examples reduced the need for private letter rulings across the board, has been borne out in practice.

The promise of the L3C, that a state-law label could convert a federal facts-and-circumstances test into a checkbox, was structurally incompatible with PRI doctrine in 2008 and remains so in 2021. The IRS has never issued a Revenue Ruling, Revenue Procedure, or Notice that accords any PRI significance to L3C status. Thirteen years of sub-regulatory silence from the Service is not a pending question. It is the answer.

The Corporate Transparency Act lands on every L3C

The Corporate Transparency Act, enacted as Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. 116-283, on January 1, 2021 over President Trump's veto, is the first major new federal filing obligation to hit small entities since the LLC went national. We walked through the statute in January. The operative provisions live at 31 USC § 5336, which Section 6403 of Pub. L. 116-283 inserted into the Bank Secrecy Act.

The statute requires every "reporting company" to file with FinCEN a report identifying each of its beneficial owners and each applicant, including full legal name, date of birth, current address, and a unique identifying number from a passport or driver's license, along with an image of the document. A "reporting company" is any corporation, limited liability company, or "other similar entity" created by the filing of a document with a secretary of state or equivalent office, subject to 23 enumerated exemptions at 31 USC § 5336(a)(11)(B).

An L3C is a limited liability company created by filing with a state secretary of state. It is therefore a reporting company by the plain terms of the definition. The exemption list does not reach it. Exemption (xix) covers 501(c) organizations, which the L3C is not; the L3C is a for-profit state-law entity that cannot receive tax-deductible contributions from individuals and does not file Form 990. Exemption (xxi) covers certain "large operating companies" with more than 20 full-time employees, more than $5 million in gross receipts, and a physical United States office. No L3C operating at the typical scale meets that test. Exemption (xx) covers "subsidiaries" of certain exempt entities, but only where the exempt entity owns or controls the subsidiary, and foundations funding an L3C through a PRI generally do not take a controlling equity stake. Every other exemption (banks, broker-dealers, credit unions, registered investment companies, public accounting firms, public utilities, certain insurance producers, pooled investment vehicles) is structurally inapplicable.

The reporting timeline was still pending as of this writing. FinCEN published an Advance Notice of Proposed Rulemaking on April 5, 2021 (86 Fed. Reg. 17557) and took comments through May. The Notice of Proposed Rulemaking is expected before the statute's January 1, 2022 deadline. Section 6403(b) directs that final regulations issue no later than one year after enactment, and that the reporting obligation attaches on the effective date of those final regulations. Existing entities will then have two years to file an initial report, and entities formed after the effective date will report at formation.

The practical read for an existing L3C is that another filing is coming. The fee is zero, the time is small, and the data is the same beneficial-owner data any well-run entity should already have on file. For a new L3C, the CTA filing attaches at formation alongside the state filing and any federal income-tax election. None of that is a large cost. What it is, is one more federal touchpoint on a form whose entire reason for being was that it would reduce federal friction. The L3C was supposed to make one federal determination (PRI status) easier for its funders. It made none easier, and it has now picked up a new federal filing of its own.

The benefit corporation is printing IPO covers

The L3C's theoretical competitor, the benefit corporation, became a field-observable market fact in August. Warby Parker filed its S-1 on August 24, 2021 as a Delaware public benefit corporation. Allbirds filed its S-1 on August 31, 2021 as a Delaware public benefit corporation. Two public offerings on the same entity form inside eight days, both under 8 Del. C. §§ 361 through 368 as amended by Delaware House Bill 341 (signed July 16, 2020), which removed the two-thirds supermajority and the appraisal rights that had made PBC conversions expensive. Lemonade had already listed as a Delaware PBC in July 2020, and Vital Farms in July of the same year. The form that the L3C's advocates used to be compared to in pitch decks is now on the cover of prospectuses.

Thirty-seven states and the District of Columbia have benefit- corporation legislation on the books as of late 2021, with Arizona's statute taking effect in December 2020 and North Carolina's in 2018 (a legislature that repealed the L3C and adopted the benefit corporation within three years of the same body, which is a legible preference). B Lab's separate Certified B Corporation program, which is a certification rather than a legal form, has crossed 4,000 companies globally. The benefit corporation succeeded because it is a corporation, because it solved the signaling problem without asking federal tax law to cooperate, and because institutional investors adopted the form for clients whose LP-level preferences now require mission alignment disclosed at the entity level.

The L3C, by contrast, is still an LLC whose operating agreement tracks language a plain LLC's operating agreement could also track, with no certification regime, no institutional investor template, no federal tax consequence, and now a federal beneficial-ownership filing on top. On every measurable axis (signaling, investor recognition, conversion friction, tax optionality), the benefit corporation wins.

Three narrow lanes are now two

The 2020 post-mortem identified three surviving use cases for the L3C: the funder-request case, the in-state-operations case, and the naming case. Twenty months of further observation has compressed that list.

The funder-request case is shrinking fastest. Foundations that updated their PRI diligence templates against TD 9762 in 2016 and 2017 have, through normal turnover of philanthropy counsel, increasingly dropped the L3C-specific language from their preferred-recipient forms. Counsel advising foundations in 2021 is, in the general case, indifferent to whether the recipient is an L3C or a plain LLC, because the operative analysis lives in the operating agreement and the deal documents. A handful of foundations still reference L3C status in their application portals, usually because the portal text has not been updated since 2014. That is not a lane with momentum.

The in-state-operations case, where a company plans to operate only inside a single L3C state, has a clear charitable purpose fitting IRC § 170(c)(2)(B), and wants the statutory mission-primacy language baked into the formation document, remains honest. Vermont and Michigan are the two jurisdictions where this rationale has real weight, because the in-state advocacy community recognizes the label and treats it as a filtering signal. Outside those two states the in-state signaling value is marginal.

The naming case, where founders want "L3C" on the letterhead for donor or marketing reasons, has collapsed into something smaller than a lane. A benefit corporation with a mission-aligned name, or a plain LLC with "Impact" or "Community" in the title, produces substantially the same optical effect. The "L3C" suffix is now more likely to trigger a lawyer's question ("wait, you formed a what?") than a reader's recognition.

What a 2021 founder should actually do

Form a Delaware public benefit corporation if the business will take outside capital and wants a mission-aligned charter. The DGCL path is now tested at the IPO cover-page level, and the 2020 amendments removed the friction that made earlier PBCs expensive to convert out of. Form a plain LLC in the operating state with an operating agreement that tracks Treas. Reg. § 53.4944-3 in substance if the business will be funded primarily by foundation PRIs and wants the mission-primacy language in the deal documents. Have the foundation's counsel review the terms. Do not ask the state-law label to do the work the regulation asks the deal to do.

Form an L3C only if a specific funder has asked for one by name, or if the operation is wholly in-state in Vermont or Michigan and the in-state signaling is worth a few hundred dollars of formation cost and a federal beneficial-ownership filing. The set of founders for whom either of those is the right answer is small, and it is getting smaller.

The L3C is not dead at thirteen. It is alive in the way a species with a frozen range and a declining per-jurisdiction formation rate is alive, which is to say, it is a form still visible on the map but no longer moving. Vermont's Act 106 will remain in the statute book, Illinois and Michigan will continue to produce a trickle of filings, Americans for Community Development will continue to maintain its website, and every L3C formed from here will carry a CTA reporting obligation alongside the state filing. None of that is a revival. It is the second half of a decline that the IRS started in 2008, the benefit-corporation statutes compounded through the 2010s, and the Corporate Transparency Act is now closing out.

Sources

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