MEMORANDUM OF OPPOSITION Printer Friendly Version
(A. 6116 – Mem. of Assem. Brennan / S. 3011 – Sen. Espaillat)
To: Members of the New York State Legislature
From: Doug Sauer, CEO – New York Council of Nonprofits, Inc. (NYCON)
Re: Low-profit Limited Liability Corporation (L3C) Legislation
Purpose of Proposed Legislation:
Proponents of the L3C movement argue that the creation of this new “hybrid legal structure will combine the financial advantages of limited liability companies (LLCs) with the social advantages of a non-profit entity”.
Problems with Proposed Legislation:
1. L3C’s are directly contrary to the active interests of the Governor, Attorney General and Legislature in eliminating abuse of public resources and promoting accountability. Considerable attention and effort are underway by the State to curb unethical conduct, prevent excess executive compensation, the misappropriation of charitable assets, and detect instances fraud within the nonprofit sector. L3C’s are an alternative path to charities or profiteers who seek to avoid public scrutiny and appropriate regulatory, oversight including executive compensation. It makes no sense for policymakers to heighten regulations to prevent abuse of public and charitable dollars for nonprofits on one hand and then to allow for new for-profit corporate entities that have greater freedom to engage in such practices .
2. Passage would be premature. This proposed legal structure has yet to be granted an advisory opinion from the Internal Revenue Service (IRS) and, according to recent research, it will not likely receive permanent approval from the IRS in the future.* Additionally, the NYS Attorney General has yet to provide an opinion on its merits and regulatory implications.
3. This legislation is not necessary for social entrepreneurism to thrive through existing for-profit or not-for-profit model. Many “cutting edge” models exist in our state including nonprofits operating and owning tax-paying commercial businesses and Benefit (“B”) Corporations which were approved last year.
4. L3C’s unacceptably risk charitable assets to support for-profit investors and well-compensated executives. The typical L3C business model is for charitable assets to be in the first risk position to soften the financial risks of private investors. Proponents seek to leverage state legislation in the hopes of the IRS someday easing their strict regulations for private foundations to invest in risky for-profits through what are called Mission Related Investments (MRI) and Program Related Investments (PRI). The overwhelming majority of Foundations avoid making such investment because of financial and fiduciary risks, the extensive IRS scrutiny involved, and the adverse impact of diverse such funds from the charitable sector.
5. Passage will cost taxpayer money. Contrary to the Sponsor’s Memorandum, there will be fiscal implications to the State with regards to monitoring compliance and responding to the fiduciary problems that will undoubtedly arise.
6. Opposition to L3C’ grows as it becomes more understood. The American Bar Association passed a resolution opposing the creation of the L3C model**. The ABA noted in their resolution that L3C’s are “unnecessary” to accomplish the purposes intended and would substantially added risk charitable assets.
* The L3C Illusion: Why Low-Profit Limited Liability Companies Will Not Stimulate Socially Optimal Private Foundation Investment in Entrepreneurial Ventures
** Resolution of the Committee on Limited Liability Companies, Partnerships and Unincorporated Entities – Section of Business Law – American Bar Association