Low-profit LLCs
With the effectiveness of Public Act 96-126 on Jan. 1, 2010, low-profit limited liability companies, or L3Cs, have been introduced in Illinois. Among other changes, a new Section 1-26 was added to the Illinois Limited Liability Company Act.
This new section reads:
(805 ILCS 180/1-26)
Sec. 1-26. Low-profit limited liability company.
(a ) A low-profit limited liability company shall at all times significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, 26 U.S.C. 170(c)(2)(B), or its successor, and would not have been formed but for the relationship to the accomplishment of such charitable or educational purposes.
(b ) A limited liability company which intends to qualify as a low-profit limited liability company pursuant to the provisions of this Section shall so indicate in its articles of organization, and further state that:
(1) no significant purpose of the company is the production of income or the appreciation of property; however, the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property; and
(2) no purpose of the company is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the Internal Revenue Code of 1986, 26 U.S.C. 170(c)(2)(D), or its successor.
(c) A company that no longer satisfies the requirements of this Section 1-26 continues to exist as a limited liability company and shall promptly amend its articles of organization so that its name and purpose no longer identify it as a low-profit limited liability company or L3C.
(d) Any company operating or holding itself out as a low-profit limited liability company in Illinois, any company formed as a low-profit limited liability company under this Act, and any chief operating officer, director, or manager of any such company is a “trustee” as defined in Section 3 of the Charitable Trust Act.
(e) Nothing in this Section 1-26 prevents a limited liability company that is not organized under it from electing a charitable or educational purpose in whole or in part for doing business under this Act.
Note that P.A. 96-126 also amends Section 1-10 of the Limited Liability Company Act to provide that any company organized pursuant to Section 1-26 shall contain the term L3C in lieu of the traditional designations of LLC or L.L.C.
(805 ILCS 180/1-10)
Sec. 1-10 Limited Liability company name
(a) The name of each limited liability company name as set forth in the articles of organization:
(1) … if organized as a low profit limited liability company under Section 1-26 of this Act, shall contain the name “L3C”;
INTERNAL REVENUE CODE
In establishing the criteria for qualifying as a low-profit LLC, or L3C, subsection (b)(2) of new Section 1-26 refers to Section 170(c)(2)(B) of the Internal Revenue Code of 1986. As of June 9, 2009, that Section reads:
(Title 26>Subtitle A>Chapter 1>Subchapter B>Part VI>§170) §170. Charitable, etc., contributions and gifts.
…
(c)…
(2)…
(B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals;
…
REQUIRED DECLARATIONS FOR AN L3C
As a result of the above state and federal provisions, a company intending to either form as or amend to become a low-profit limited liability company must include the term L3C in lieu of LLC or L.L.C. in its title and also include the following three statements as part of its purpose in Article 5 of the Articles of Organization:
1. The company intends to qualify as a low-profit limited liability company pursuant to Section 1-26 of the Limited Liability Company Act and shall at all times significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, or its successor, and would not have been formed but for the relationship to the accomplishment of such charitable or educational purposes.
2. No significant purpose of the company is the production of income or the appreciation of property.
3. No purpose of the company is to accomplish one or more political or legislative purposes within the meaning of Section 170(c)(2)(D) of the Internal Revenue Code of 1986.