“Can a 501c3 be an LLC?” is a question that some owners of limited liability companies (LLCs) ask in order to determine if they can be eligible for tax-exempt status. Section 501(c)(3) is a section in the Internal Revenue Code that lists the general requirements that organizations need to meet in order to obtain tax-exempt status.

Can an LLC be Tax-Exempt?

An LLC refers to a business entity with one or more members that can operate for many different purposes, including non-profit purposes. Technically, non-profit LLCs do not exist in most states. However, there are tax-exempt LLCs, which are essentially non-profit LLCs.

How Does an LLC Become Tax-Exempt?

Section 501(c)(3) is the part of the Internal Revenue Code that lays out the eligibility criteria for tax-exempt status. While it does not mention anything about LLCs as eligible entities, the IRS allows them to attain tax-exempt status. However, an LLC is not only required to meet the eligibility requirements stated in 501(c)(3); it must also meet IRS's criteria.

An organization can be a tax-exempt LLC if it is under the ownership of a 501(c)(3) organization or governmental unit or the full ownership of a subdivision of a state or political organization. In addition, it is required to meet all 12 conditions listed in the IRS paper entitled “Limited Liability Companies as Exempt Organization Update.” According to IRS regulations, an LLC cannot be granted tax-exempt status directly. In order to obtain tax exemption, its members can establish a non-profit corporation and run an LLC under the full ownership of the corporation. 

An LLC is not allowed to have a non-profit tax-exempt status because it has members who are also its owners. It can only be used to hold a nonprofit corporation's assets if it is a qualified subsidiary of the corporation. In order to do this, the non-profit corporation has to be the LLC's sole member and have full control over its activities. This single-member LLC must be under the control of the corporation's directors and officers. In addition, the LLC must state in its Operating Agreement that it cannot violate the restrictions or bylaws on its member 501(c)(3) corporation.

501(c)(3) Eligibility Criteria for LLCs

In order to become tax-exempt under Section 501(c)(3), an LLC must meet three requirements:

  • Organized requirement – The organization must adopt a legal structure that qualifies for tax-exempt status.
  • Operational requirement – The LLC is required to avoid engaging in certain activities.
  • Purpose requirement – The LLC must operate through one or more of the exempt purposes listed in Section 501(c)(3), such as charitable, educational, literary, or scientific purpose.

IRS Requirements for Tax Exemption

To satisfy IRS eligibility requirements for tax-exempt status, an LLC must not have nonexempt organizations or individuals as members. Additionally, it must have certain IRS-compliant language in its organizational documents. The organizational language must:

  • Limit the activities of the LLC to at least one exempt purpose.
  • State that the LLC operates exclusively for the purpose of furthering the charitable endeavors of its members.
  • Specify that the members of the LLC must be 501(c)(3) organizations, government units, or instrumentalities that are under the full ownership of a political or state subdivision.
  • Prohibit the direct or indirect transfer of membership interest to any party other than a 501(c)(3) organization, government unit, or government instrumentality.
  • State that a nonmember other than a 501(c)(3) organization, government unit, or government instrumentality may only avail or receive direct or indirect transfer of the LLC, interests other than membership interests in the LLC, or assets of the LLC in exchange for fair market value.
  • Guarantee that assets of the LLC that are devoted to charitable purposes will remain as so following the organization's dissolution.  
  • Require that all amendments made to the Articles of Organization and Operating Agreement of the LLC comply with Section 501(c)(3).
  • Prohibit the LLC from converting into or merging with a for-profit entity.  
  • Prohibit the LLC from distributing assets to members that are no longer Section 501(c)(3) organizations, government units, or government instrumentalities.
  • Include an acceptable contingency plan to prepare for the possibility that one or more of the LLC's members cease to be a 501(c)(3) organization, government unit, or government instrumentality.
  • State that exempt members of the LLC will efficiently and forcefully impose all their rights in the LLC and use every fair and legal measure available to guard their interests in the LLC.
  • State that the LLC must indicate that all its organizational documents are compliant with state LLC laws and enforceable in equity and at law.

If your LLC need help with meeting 501(c)(3) requirements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.