L3C vs. benefit corporation: What's the difference?

If you are planning to start a for-profit business with the goal of supporting some type of public benefit, you may have the option to organize your company as a low-income limited liability company (L3C) or a public benefit corporation.

Your choices will depend on your state laws. Only Illinois, Kansas, Louisiana, Maine, Rhode Island, Utah, and Vermont allow you to utilize the L3C and benefit corporation designations.

What are L3Cs and benefit corporations?

An L3C is a special type of limited liability company (LLC) that can operate as a for-profit venture that serves a public benefit. Similarly, a benefit corporation is a special type of hybrid corporation.

Both L3Cs and benefit corporations provide a limitation of liability. They must be created and maintained according to state law, and are subject to state and federal tax laws.

Differences between L3Cs and benefit corporations

The main differences between a benefit corporation and an L3C are their management structure and record-keeping requirements, and the states in which they may be created.

• Management and record keeping. One factor to consider in choosing between a benefit corporation and an L3C is whether you want a corporate business structure or the less formal LLC structure. State laws generally impose more formal management and record-keeping requirements for a corporation than for an LLC. However, added record-keeping and reporting requirements are typical for both benefit corporations and L3Cs to show they are achieving their public benefit purpose. This may also require obtaining a third-party evaluation of the company's public benefit performance.
• State of creation. Not all states allow the creation of L3Cs and benefit corporations. If your state does not authorize the type of entity you desire, you can form a benefit corporation or L3C in a state that does allow it, then register the company in your state as a foreign entity. Benefit corporations are currently authorized in the District of Columbia and 36 states. As of June 2020, only about 1,700 L3Cs had been formed nationwide. This shows a trend in favor of the benefit corporation over the L3C, which may be another factor to consider.

How to start a benefit corporation

A benefit corporation, like any corporation, has shareholders who contribute funds to the business, a board of directors to oversee the management of the corporation, and officers who handle day-to-day operations.

To form a benefit corporation, file articles of incorporation with the appropriate state agency. The articles should state that the business is being formed as a benefit corporation and the benefit purpose for which it is being created.

How to start an L3C

An L3C, like a traditional LLC, has members who contribute funds to the business and managers who handle day-to-day operations.

L3Cs are typically formed by filing articles of organization with the appropriate state agency. This is the same as for any LLC, except for added provisions stating that the business is being formed as an L3C and stating the benefit purpose for which it is being created.