Can an LLC Be A 501c3: Everything You Need to Know
Have you wondered, "can an LLC be a 501(c)(3)?" An LLC is a legal enterprise that may be used for a variety of purposes including charitable purposes. 4 min read
Updated July 6, 2020:
Have you wondered, "can an LLC be a 501(c)(3)?" An LLC is a legal enterprise that may be used for a variety of purposes including charitable purposes. The protection a limited liability company offers its members is one of the most attractive advantages. Generally, the members are not responsible for the debts and obligations of the LLC. Technically, there is no non-profit LLC. In most states, LLCs are allowed to be tax-exempt. LLCs are then known as “nonprofit limited liability companies,” "tax-exempt LLCs," or “non-profit LLCs."
Non-profits are usually formed as corporations; however, they can also be formed as limited liability companies. Not all states allow non-profits to operate as LLCs. An LLC is more appealing than a corporation when it comes to internal management flexibility. An LLC or a low-profit LLC can conduct business as a non-profit LLC if the limited liability company is solely owned by a single non-profit organization and the LLC meets all requirements set forth in the “Limited Liability Companies as Exempt Organization Update" mandated by the IRS.
Disadvantages of Forming LLCs
Non-profits usually do not file as an LLC. The process is lengthy and at times difficult, so non-profits find it easier to file for a corporation. An LLC is more appealing than a corporation when it comes to internal management flexibility. All of its owners must have 501c3 status as well, meaning all members of the 501c3 would have to incorporate as a non-profit, then form the non-profit LLC. It may make sense for a group of existing companies to come together and form a nonprofit LLC.
The Proper Way to Form a Non-Profit
- A corporation is the most common and usually appropriate way to form a non-profit.
- State laws under which LLCs are formed vary from state to state.
- You can usually form an LLC or a corporation by filing documents with your Secretary of State (SOS).
- Corporations are governed by a board of directors, which is why some states require non-profits to be corporations.
- The internal rules for the non-profit are drafted by the board.
Non-Profit 501(c)(3) Regulations
Below are some regulations 501(c)(3) organizations must follow:
- The Internal Revenue Code 501(c)(3) status allows non-profits tax-exempt status.
- Donations to 501(c)(3) organizations are tax deductible.
- The tax-exempt status allows them to avoid federal corporate income tax.
- In most states, 501(c)(3) organizations avoid state tax, sales tax, and property state taxes.
Rules Regarding LLCs Starting LLCs
LLCs are not typically able to qualify for 501(c)(3) status; the qualifying business types are corporations, foundations, community chests, and funds. However, some states updated laws to allow non-profits to form LLCs. There has been some confusion about whether an LLC can apply as an exempt organization because the IRS does not specify. The IRS allows LLCs to have tax exempt status under certain circumstances. In situations where the 501(c)(3) is allowed by the IRS:
- The LLC has to pay taxes like a corporation.
- The LLC must file a statement that it will divide its assets to another non-profit if the LLC will no longer operate as a non-profit.
However, there is more flexibility in terms of managing members. For example, an individual may act as a manager and be on the board directors.
When the business is forming an LLC non-profit, the IRS will make the final decision about the business' tax-exempt status. If you want to start a tax-exempt non-profit organization, you must have organizational documents giving a simple explanation of one or more exempt activities in which the company will engage, containing the following language:
- The LLC will operate exclusively for the charitable work of the members.
- LLC members have to be 501(c)(3) organizations, government-related, or wholly-owned entities of a state or a political divide.
- The direct or indirect transfer of any membership interest in the LLC to a recipient who is not a 501(c)(3) organization or governmental unit is prohibited.
- Interest in the company must be sold to a company other than a 501(c)(3) organization, governmental unit, or instrumentality.
- Upon dissolution, all LLC assets devoted to charitable purposes must continue to be used only for charitable purposes.
Other regulations may apply so it is always a good idea to consult an attorney before forming your non-profit 501(c)(3). If you need help with the proper way to form your 501(c)(3) non-profit or LLC, you can post your legal need (or post your job) 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.