Intro to the Low-Profit Liability Liability Company and the “B-Corp”
Lately these two concepts have been coming up frequently in my interactions with entrepreneurs leaders of corporations. Many people today are concerned with more than just the dollars-and-cents bottom line and so they find the ethos behind these corporate forms appealing.
Today, let’s nail down a quick definition of each and learn about the most important differences between the two.
L3C
The Low-Profit Liability Liability Company (“L3C” for short) states in its founding documents that profit generation is not its “significant purpose.” Instead, it must “significantly further” a charitable purpose.1 The purpose of choosing the L3C over an LLC or C-Corp is to hopefully be a more attractive candidate for investment from charitable foundations. This is because charitable foundations must spend their cash on a charitable purpose2 and their spending cannot benefit individuals—only the public at large. Because L3Cs explicitly state that they’re not just chasing profits, this should make it easier for foundations to invest in them.
B-Corp
The Benefit Corporation (“B-Corp” for short, and a wordplay on existing concepts like “C-Corp” and “S-Corp”) is a wholly for-profit entity with ordinary shares. What makes it different is its commitment to “general public benefit.”3 B-Corps submit to certification and are graded by a third-party on their performance in areas like Environment, Community, or Employees. They also have special obligations to internal oversight in the form of a “benefit director” and public oversight in the form of “annual benefit reports.” It’s like Corporate Social Responsibility with some teeth.
What’s the Difference and What’s Right for Me?
One big difference is that, because each form expressly dethrones profits, shareholders will have problems filing lawsuits on theories that their shares’ value isn’t being optimized.
For most businesses though, the legal and business considerations that go into corporate formation have to do with funding and governance. Through that lens, there are probably limited circumstances when a L3C or B-Corp is preferred over a traditional form.
One is where you are a fantastic match for funds from charitable foundations. I say fantastic because there is usually less money available than is needed for charity. To get foundation money into your L3C, your business might have to exist in a space where tax-exempt organizations don’t typically do what you do. If there are some in your space already, these are more attractive targets for foundation donations. But one big problem to keep in mind with L3Cs is that they were created to try to get around an onerous IRS approval process.4 The catch-22 is that until that same IRS process blesses the L3C form, foundations aren’t as likely to fund them.
A B-Corp may be called for where public perception is very important to your business. A B-Corp doesn’t change much about the legal issues around a Company except for adding more governance requirements. However, it does bring some third-party verification of your corporate social responsibility. In other words, people are less likely to think that B-Corps are just another form of greenwashing.
1. These quotes are taken from the Vermont Statute on L3Cs.
2. Not every noble cause earns a tax-exemption! See here for a list of charitable purposes.
3. This quote is taken again from the Vermont Statute.
4. See Lang, Robert, PRIs and Private Letter Rulings (PDF Link).
