Low-Profit LLCs: Charity Killers?

Statehouses from Maine to Montana are debating whether to join Vermont and Michigan and allow companies to organize as Low-Profit LLCs (LC3), businesses that are created to solve social problems.

This doesn't mean that the Pfizers and First Solars of America will be able to reorganize as tax-free entities. LC3s are operated (and taxed) just like LLCs, but profits must be secondary to achieving a charitable or educational goal.

The main advantage of the LC3 designation is that it allows foundations to easily become financial stakeholders in private enterprises without needing lawyers to sign off that the business would qualify as a "program related investment" in the eyes of the IRS. LC3 advocates argue that this structure frees up funding to support everything from newspapers to affordable housing projects.

However, with endowments shrinking along with the rest of the market, traditional charities are struggling to win ever smaller slices of the grant pie. Nonprofits whose value to society primarily involves "raising awareness" about an issue will face stiff competition from LC3s that can attack a problem while also creating jobs in a community.

Yet the LC3's entrance into the market does not necessarily have to be a zero-sum game. Charities can also create LC3s to maximize revenue from their commercial activities.

After all, a little competition is a good thing, right?