Sunday, April 27, 2014
Jill Manny (New York University School of Law) recently published an article entitled, Much Ado About Nothing: A Comment on Tyler’s Paper on Regulating Charitable Hybrids, 9 N.Y.U. J. L. & Bus. 587 (2013). Provided below is her introduction:
Low-profit, limited liability companies, commonly known as “L3Cs,” are recent creatures of state legislatures. The form of entity demonstrates a “hybrid” purpose combining hallmarks of both for-profit and nonprofit entities: profit distribution and social mission. They were inspired and marketed with a primary goal of attracting program-related investments from private foundations, a goal that remains unrealized and unlikely to be accomplished without some change to the Internal Revenue Code. L3Cs are treated, for purposes of Federal tax law, as for-profit and taxable, indistinguishable from LLCs.
John Tyler's insightful paper, Analyzing Effects and Implications of Regulating Charitable Hybrid Forms as Charitable Trusts: Round Peg and a Square Hole?, focuses on the treatment of L3Cs and, to a lesser extent, other “hybrid” forms of entity, at the state level, by state attorneys general. The paper's primary concern is that L3Cs may be subject to charitable trust laws and regulated as charitable trusts, subject to the nondistribution constraint which distinguishes nonprofit from for-profit entities and makes distribution of profits unlawful. Regulation of L3Cs under state charitable trust law would, in effect, confiscate half of the hybrid purpose by forbidding profit distribution, leaving the L3C form with a primary burden of charitable status (i.e., the nondistribution constraint) but with none of the benefits of charitable status (e.g., right to receive tax-deductible contributions).
This comment will briefly provide background on the L3C form, its history, and its challenges, both at the state level and the Federal tax level. It will then review Mr. Tyler's concerns regarding the crippling impact of the application of state charitable trust law to L3Cs and argue that some of these concerns may be unfounded because charitable trust law is unlikely to be applied to regulate L3Cs. Finally, the paper will conclude that the L3C form does not and cannot accomplish its intended purposes and should be avoided in favor of other types of entities more suited to the dual mission.