- L3Cs are designed to take advantage of Program Related Investments (PRIs) by private foundations and could allow a venture to tap into new sources of capital.
- The L3C's tiered capital structure could guarantee market-rate returns to senior-tier members and may attract more commercial investors than a traditional LLC would.
- The L3C may be an attractive option for entities with a clear business plan identifying committed private foundation investors whose charitable purpose is consistent with the L3C's social objectives.
- The L3C brand communicates the media entity's commitment to a social goal and may serve as a marketing tool for attracting nonprofit and socially-conscious for-profit investors as well as consumers.
- An L3C may not be organized for political or legislative purposes. This restriction may be limiting to the types of publishing in which an online media L3C may engage.
- PRIs are not common among private foundations and securing them may be difficult. A survey of over 72,000 private foundations shows that PRIs of $10,000 or more accounted for less than 1% of private foundations' qualifying distributions in 2006 and 2007.
- To qualify for PRIs, an L3C must further the investing private foundation's charitable goals. For online media ventures, this narrows down the pool of potential private foundation investors to those whose missions can be accomplished through online publications. The "mission furtherance" requirement may also limit the kinds of materials and online media L3C can publish to those that conform with and further the private foundations' goals.
- Even if a private foundation agrees to invest in an L3C, there is a significant risk the investment will be considered a jeopardy investment and subject the foundation to federal penalty taxes. So long as state laws authorizing L3Cs do not bind the IRS on the PRI issue, there is no federal tax benefit to forming an L3C as opposed to an LLC. Private foundation managers must be equally cautious when investing in L3Cs and LLCs. In general, this means seeking either the written opinion of counsel or a private letter ruling by the IRS, both of which are costly.
- Given the challenges of securing investments from private foundations, the efforts necessary to provide market-rate returns on commercial investments in the L3C could be significant. This could compromise an L3C's commitment to keep profit-making a secondary concern, which could make it even more difficult to obtain investments from private foundations.
- Private foundation investors will require management rights in an L3C in order to ensure that their charitable purposes are accomplished and guard against private inurement. If any part of the foundation's net earnings accrue to the benefit of a private individual, the foundation will loose its tax exemption.
- Compared to a non-profit, an L3C may make it more difficult for a venture to receive donations since such contributions will not be tax deductible.