Can the L3C Spur Private Foundation Program-Related Investment?

Abstract

The L3C, a modified form of the LLC, is a new hybrid entity that has been formed in several states.  Its major aim is to facilitate capital-raising for social causes in both non-profit and for-profit sectors.  In order to accomplish this, the L3C must attract significant program-related investments (“PRIs”), which are investments private foundations can make that further the foundation’s social mission, and thus do not subject the foundation to a variety of penalty taxes.

This Note argues, however, that the L3C will not cause private foundations to make significantly more PRIs.  The IRS standard for PRIs requires private foundations to make a case-by-case determination of the nature of the investment, which L3C legislation does not respond to.  Additionally, expenditure-responsibility requirements impose on private foundations a level of due diligence that is at odds with L3C advocates’ claims of a more streamlined decision-making process for making PRIs into L3Cs.  Federal legislation is necessary to make the L3C more effective in spurring PRI, but such legislation is unlikely to be passed.