In Tenn., a Plan to Give L3Cs Tax Exemptions

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February 2, 2013; Source: Dyersburg State Gazette

Occasionally, nuggets of information of importance to the nonprofit sector pop up in the unlikeliest places. Here’s one: At a recent “legislative coffee” briefing in Dyersburg, Tenn., State Rep. Bill Sanderson discussed the bills he plans to introduce in the upcoming legislative session. On his docket is a bill to give tax exemptions for low-profit limited liability corporations, otherwise known as L3Cs. 

The newspaper report of the bill was simply a one-line mention with no further explanation from the legislator. But this is what should have been expected of entities that are pitching themselves as able to be better than charities in fulfilling charitable purposes—and to make a profit while doing it.

Are other states contemplating tax exemptions for L3Cs? On what basis? And how will granting tax exemptions to L3Cs based on their corporate form affect state and local consideration of the tax-exempt status of 501(c)(3) charities? If for-profits such as L3Cs or B corporations are able to obtain tax exemptions as for-profits doing charitable activities, does that reduce the argument for the special tax treatment of nonprofits? —Rick Cohen

  • Caryn Capriccioso

    My guess is that Representative Sanderson has misunderstood the L3C or he was misquoted in stating he intends to suggest tax exemptions for L3Cs. However, I will be keeping an eye on the TN L3C legislation as it is introduced as that would be quite a twist in the way L3Cs are designed.

    What is more interesting here is the statement “this is what should have been expected of entities that are pitching themselves as able to be better than charities in fulfilling charitable purpose…” As a co-founder of the 39th L3C in the county and someone who has followed the evolution of the L3C closely over five years, I can assure you that those choosing the L3C entity are not doing it because they think they are “able to be better than charities” and they certainly are not “pitching themselves” in that way.

    For a view into the minds of the L3C entrepreneur, their motivations and the challenges they face given this misunderstood business form, I suggest reading interSector’s paper: Who is the L3C Entrepreneur?

  • Rick Zwetsch

    I’d like to post a comment here but it appears that some comments show up in this space and then mysteriously disappear. Am I wasting my time posting a comment?

  • Robert Lang

    These well meaning ideas crop up every now and then but as the creator of the L3C I absolutely oppose any tax exemptions for L3Cs. The L3C was meant to be a taxpayer since it is a for profit. The entire concept is to move charitable work that can be self sustaining, as long as its cost of capital is low enough, to the for profit sector. Nonprofits play an important role and if over time their numbers can be diminished because for profits can pick up some of the load the remaining nonprofits will actually have a larger pool of dollars from which to request donations so all will benefit. Tax exemptions increase the burden on governments and the taxpayers by diminishing sources of revenue. A community trying to revitalize its downtown does not need to have its tax base further eroded by having nonprofit buy up property to revitalize. It needs that property to be purchased by a taxpayer that will not only revitalize the downtown but pay taxes to the community. Those taxes will help the local government provide more services to those it was created to service.

  • Ruth McCambridge

    Thank you Robert! This is helpful information indeed. Love to get an article from you sometime re all of the embroidery

  • Rob Bryan

    I doubt Sanderson understands the L3C. This won’t go anywhere.

    Rick (Cohen), I’ve never heard any L3C founders or so called “promoters” say that they are able to be better than charities in fulfilling charitable purposes. And I’ve been to a couple of conferences and have been talking with L3C colleagues colleagues consistently for several years now. I would say that whoever said that hasn’t done it yet. No one I’ve ever met wants tax exemptions for L3C’s.

    One way to view L3C’s is this- If a nonprofit CAN accomplish a charitable mission on a for profit basis, should it be doing so with tax-exempt charitable funds? I say no, turn those activities over to taxable entities and get on with the stuff that can only be done on a nonprofit basis.

    Our current capital structure is pretty skewed. It seems to only allow for either venture capital level returns in the +20% range, or nonprofit returns in the 0% to -5% or so range. There are lots of activities however that can operate in the 0% to 7% range where the L3C operates.

    In fact, there are many L3C’s whose purpose is to provide support and funding for nonprofits. Windhorse Lightships, L3C, our organization is one of those. One of our primary reasons for choosing the L3C over a 501c3 corp is ownership. Not absentee investor owners, but employee ownership with democratic governance. We can’t do what we intend without a committed, highly skilled workforce with a very low turnover rate. We also have a maximum salary ratio (5-1) that even few nonprofits can match. Nobody is getting rich in the L3C community.

    A google search on the L3C will return a lot of BS and speculative comments, mostly copied from other BS and speculative comments on other web pages. A reliable source of information are the Linked In Groups- L3C Founders, L3C Connect, and House of L3C. These groups are well moderated by experts in the field.


    Ruth, I would be glad to talk about writing a piece. Please contact me through my regular link:

    Bob Lang, Creator of the L3C and Founder
    Americans for Community Development