Survey: Are Nonprofit Organizations Taking Advantage of L3Cs for the purposes of Making Safe Program-Related Investments?

• In Event: Government/NPO and Other Accounting Issues

Abstract

Traditionally, investing in PRIs has been a risky business. If not done correctly, private foundations would face a very real threat of losing their tax-exempt status and being charged with penalty taxes. In order to safely invest in PRIs, private foundations would almost always need to apply for a costly and time-consuming Private Letter Rulings from the Internal Revenue Service. However, this was the reality prior to the creation of a low-profit limited liability company, or L3C. With the use of L3Cs, it is believed that non-profit organizations can safely make program-related investments without the need for obtaining a Private Letter Ruling from the Internal Revenue Service. Our paper will empirically examine if non-profit organizations are truly taking advantage of L3Cs to make program-related investments and whether L3Cs are truly a practical solution for non-profit organizations to successfully invest in such socially-conscious businesses.
Prior to L3Cs, most private foundations were quite justified in turning away from PRIs and looking for other arrangements. To make sure that a desired investment meets the three requirements of Section 4944(c) and to avoid the 10 percent penalty tax, most non-profit organizations were forced to apply for Private Letter Rulings. Private Letter Rulings, however, could take months to be issued and are costly. As the result, most PRI arrangements were not worth the trouble. The new hybrid entity, L3C, however, was specifically designed to cure that problem by offering a safe option for non-profit organizations to invest in L3Cs and generate a profit without losing their tax-exempt status. As such, our paper sets out to prove if the solution offered by L3Cs is truly successful and practical through the use of a survey of the existing L3Cs throughout all fifty states.

Authors

• Valeriya Avdeev, William Paterson University

• Hannah Wong, William Paterson University of New Jersey