Can a Non Profit Be an LLC: Everything You Need to Know
The answer to the question "can a nonprofit be an LLC" is yes, but it's not as straightforward. 3 min read
2. IRS Rules in Forming an LLC Nonprofit
3. Definition of an LLC
4. Definition of Nonprofits
5. State Information Concerning Non-Profit LLCs
Updated June 26, 2020:
Can a Nonprofit Be an LLC?
The answer to the question "can a nonprofit be an LLC" is yes, but it's not as straightforward. If a company can claim ownership by a single tax-exempt nonprofit organization, it may be able to qualify as an LLC as long as other requirements that have been set by the IRS have been met. These requirements can be found in the IRS mandate that is referred to as the “Limited Liability Companies as Exempt Organization Update.”
Forming as a nonprofit corporation can be less complicated and more straightforward, so you don't find as many LLCs forming as tax-exempt entities. To form as an LLC nonprofit, each owner would have to incorporate as a nonprofit corporation, and all of the LLC members must in effect be classified as nonprofit organizations themselves, which makes this process more complicated.
A more common situation where a nonprofit LLC would be formed is if a group of individual nonprofits wanted to join together as one tax-exempt nonprofit, though this situation is rare as well.
In many states, the term nonprofit LLC is incorrect, and these companies are often referred to as "nonprofit liability companies." The states of Minnesota, Kentucky, and Tennessee are the exceptions. In most states, there has been specific legislation enacted to enable an LLC to be formed for any legal purpose which can include nonprofit purposes.
The IRS will not give tax-exempt status to a nonprofit unless all of the members are tax-exempt organizations. Often, a group of charitable organizations will form an LLC and be granted IRS tax-exempt status.
IRS Rules in Forming an LLC Nonprofit
- The filing of organizational documents that include at least one tax-exempt objective as well as the limiting LLC activities.
- The verbiage to clearly state that it is operating for charitable purposes of its included members.
- The language must require that the members be either a government unit, a 501(c)(3) or wholly-owned agencies of a state.
- Organizational language must prohibit the transfer of any member interest to another that is not a government unit of 501(c)(3).
- The language must state that interest that is transferred to nonmembers require them to be exchanged at fair market value.
- If dissolved, the LLC assets will go to a charitable purpose.
- Any amendment of articles must consider with section 501(c)(3).
- The LLC may not merge, convert to, or become for profit.
- There may be no distributions to members who are no longer part of organizations that are nonprofit.
- There must be a contingency plan if a member were to cease being considered a nonprofit.
- The organizational language must state enforcement of LLC rules and remedies.
- All documents must comply with LLC state laws.
Definition of an LLC
An LLC combines aspects and advantages of both a corporation and a partnership. Most often, LLCs are formed by a business owner's desire to protect personal assets from risk in the event of a lawsuit. LLCs also offer tax advantages and flexibility in management structure.
Definition of Nonprofits
State laws and IRS rules and compliance will determine whether or not a company can be considered a nonprofit organization. The rules concerning forming a nonprofit have less to do with business structure and more to do with the purpose of forming the business. These purposes are most likely to form a charitable organization often referred to as a 501(c)(3), though under IRS regulations there are 26 types of nonprofit organizations that can be formed.
State Information Concerning Non-Profit LLCs
Before you begin trying to form an LLC, you should first check your state laws and regulations to determine if your business structure will qualify for a nonprofit organization, and find the rules and regulations for forming one from the state agency that oversees business organization.
Some states, such as California will have the necessary forms and instructions available for creating an LLC as well as the steps for forming a nonprofit at the Secretary of State Office. Other states may have requirements such as each organization filing articles of incorporation and then form as a nonprofit corporation, as is the case with Kentucky
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