Is a benefit corporation better than L3C? What is the difference between a benefit corporation and a low-profit LLC (L3C)? If you’re asking these questions, you’re not alone. Benefit corporations and L3Cs are relatively new types of businesses. And while they’re similar in principle, they are distinct from each other.
In this guide, we’ll cover the essential similarities and differences between a benefit corporation and an L3C.
An L3C is a “low-profit limited liability company,” or an LLC that’s organized for a hybrid entity that pursues both profit and social benefit. From a tax and organizational perspective, an L3C functions exactly the same as a standard LLC. But as socially focused businesses, L3Cs are eligible to receive PRIs (program-related investments) from private foundations. From a practical standpoint, that allows L3Cs to potentially receive a lot of third-party funding from nonprofit organizations.
Forming an L3C pretty closely resembles forming a regular LLC, as it typically requires filing the Articles of Organization provided by the state. In some cases, L3Cs have a separate form, and other states have a section for L3Cs in their regular Articles. The formation documents also have to clearly designate that the business is organized for a charitable cause, social goal, or an educational or environmental goal. After registering as an L3C, the business will have to maintain its status by submitting annual reports that prove it’s delivering social returns, too.
As similar as the L3C structure seems to LLCs, there’s one very crucial difference: they’re only available in some states. Currently, only Maine, Vermont, Rhode Island, Michigan, Illinois, Kansas, Louisiana, Utah, and Wyoming allow these entities.
A public benefit corporation is a hybrid structure, blending aspects of a nonprofit corporation and a traditional corporation. Like a nonprofit, a benefit corporation pursues a goal with some social impact. But unlike a nonprofit, a benefit corporation can generate an income that makes profits for its shareholders, like a regular for-profit business. As a result, they aren’t tax-exempt.
Benefit corporations are available in a good number of states. Here are the states that currently allow them:
Lawmakers in Michigan are also currently discussing public benefit corporation legislation, and it’s likely other states will join this list in the future, too.
There is a very important distinction we should make here: public benefit corporations are not the same as B corporations (often called a Certified B Corporation). A benefit corporation is an entity type, created by state statute. A B corporation, however, is a certification that’s provided by a nonprofit based in Pennsylvania, B Lab Global. Any entity type can apply to be certified as a B corp, including LLCs, sole proprietorships, and more. As a result, an entity could be both a B corporation and a benefit corporation.
Qualifying as a B corp requires a thorough certification process, passing the assessment with 80 points or more. Qualifying businesses will also have to uphold B Lab’s ongoing accountability provisions to stay certified. But in return, the business has a “stamp of approval” from a third party, proving to consumers that they’re good for society and the planet.
L3Cs and benefit corporations have a few similarities. For starters, both types of entities are hybrid entities, mixing components of the standard LLC or corporation with a nonprofit organization. Both businesses also allow their owners to blend social and profit-oriented objectives. As a result, neither entity type can qualify as a 501(C)(3) non-profit organization for federal or state tax purposes.
Additionally, both L3Cs and benefit corporations must maintain accurate records to prove that they’re upholding their stated benefit purposes. The exact statutory requirements for this vary from state to state, though. And like most businesses that register with the state, both L3Cs and benefit corporations enjoy limited liability protection.
While the basic premise of an L3C company and a benefit corporation is largely the same, there are some differences. For one, L3Cs are a little simpler to run and manage than benefit corporations (just as LLCs are simpler than regular corporations). But when it comes to the “benefit” structure, benefit corporations are generally more favored than L3Cs.
L3Cs are a lot less common than benefit corporations, as only nine states currently allow for low-profit LLCs. Benefit corporations are available in the majority of states (but not all). If you’re considering a benefit entity, you’ll have a better chance of forming a benefit corporation.
Starting a benefit business can be a challenging prospect, but you don’t have to go it alone. Here at ZenBusiness, we help small business owners with the “red tape” side of business so you can focus on what really matters: your charitable mission. While we don’t currently offer formation services for L3Cs or benefit corporations, we can help with other business needs. Whether you need a money app to manage your finances, help filing your annual report, a registered agent, or anything in between, we’ve got your back.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
A benefit corporation is a legal structure that exists to somehow have a positive impact on society while making a profit. Unlike a nonprofit, it can still generate income for the benefit of its shareholders. But profit isn’t the only goal for a benefit corporation.
When a company is a benefit corporation, it’s allowed to balance two goals: social benefit and profit. In a standard corporation, profit is the primary goal; social benefit can be a side goal, but a business corporation ultimately prioritizes profits. And as a result, a corporation’s leadership has to answer to its shareholders for how they positively impact the bottom line. In legal terms, the board of directors must uphold their fiduciary duties to the shareholders.
The board of directors at a benefit corporation, however, can make decisions that benefit both the charitable goal and the bottom line. The social enterprise doesn’t always have to take a back seat.
The biggest disadvantage of an L3C is that it’s not available in most states. If you want to form one, your location options are severely limited. Additionally, L3Cs are still somewhat new (they were first introduced in 2008), and the legal system is still learning how to treat it long-term.
The primary disadvantage of a benefit corporation is that it doesn’t present any unique tax benefits compared to regular nonprofits. And while benefit corporations are more common than L3Cs, they’re still not available in all 50 states. Depending on where you’re based, they may or may not be available to you.
Nonprofit corporations are generally favored over nonprofit LLCs simply because they’re more widely available. In some states, LLCs can be nonprofits, but it’s a pretty new structure. Check out our nonprofit LLC vs. nonprofit corporation guide to learn more.
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