Change LLC to Nonprofit: Everything You Need to Know
There are several steps involved in changing an LLC to a nonprofit organization, see below guidelines.3 min read
2. File Articles of Incorporation
3. Transfer Assets and Debts
4. Create an Operating Agreement
5. File Form 1023 With the Internal Revenue Service
6. Create a Mission Statement
7. Apply for Recognition of Exempt Status
Updated June 28, 2020:
To change an LLC to a nonprofit organization, do the following:
- Resolve to convert from an LLC to a corporation by voting
- Choose a name for the nonprofit organization (if you decide not to go with the LLC's name)
- Officially file Articles of Incorporation
- Transfer the LLC's assets and liabilities to the corporation
- Develop an operating agreement with clearly defined nonprofit clauses
- File Form 1023 with the Internal Revenue Service (IRS)
- Turn in relevant financial statements to the IRS
- Turn in an application for recognition of exemption under Section 501(c)(3)
Vote to Change the LLC to a Corporation
State laws differ across the country. However, most states call for a unanimous vote of an LLC's shareholders to change it to a corporation if the LLC doesn't have an operating agreement that states otherwise.
File Articles of Incorporation
Articles of incorporation have to be filed with the agency that regulates business organizations in your state of operation. Corporation registration methods vary from state to state. Some states would require an execution of new articles of incorporation for a new corporation while others allow an execution of articles of conversion. Typically, you can find the forms for LLC conversion on the official website of the government agency that regulates organizations.
After providing a name for the corporation, appoint a registered agent to stand for it. You also have to define the number of classes and shares of stock the corporation will issue. In addition, you'll have to provide an address. The fee for filing may be between $75 and $300.
Transfer Assets and Debts
Move the assets and debts of the LLC to the nonprofit organization. If the state you're operating in permits you to file Articles of Conversion, the LLC automatically becomes a corporation, and its debts and assets will be automatically moved over to the new corporation. On the other hand, if you file Articles of Incorporation, the assets and debts of the LLC will need to be manually transferred to the new corporation. The simplest way to transfer assets is to draft an agreement detailing the transaction. The agreement will require all the shareholders and the board of directors of the new corporation to sign.
Create an Operating Agreement
Implement an operating agreement with particular nonprofit clauses. Section 501(c)(3) of the Internal Revenue Code needs every nonprofit organization to add clauses that restrict the nonprofit corporation from embarking on businesses that are not related to education, charity, science, or religion. Furthermore, the operating agreement has to include clauses that declare that when the corporation is dissolved, its remaining assets must be released for charitable, scientific, religious, and educational uses.
File Form 1023 With the Internal Revenue Service
Form 1023 is the IRS's application document for 501(c)(3) status. This form is highly detailed and complicated. At the very least, you're required to provide vast documentation regarding the persons to manage the corporation, the method of managing it, and its financial goals and budget. You will need the expert guidance of a tax attorney to fill Form 1023.
The filing fee is $400 if your corporation's gross receipts are less than $10,000 per year and $800 if its gross receipts are greater than $10,000 per year. When the form is ready, mail it to the IRS office at P.O. Box 12192, Covington, KY 41012-0192.
Create a Mission Statement
State the mission of the nonprofit corporation. For instance, a business organization that deals on children's clothing may choose to be converted into a nonprofit organization that provides clothing for needy children.
Apply for Recognition of Exempt Status
When all relevant documents have been successfully processed, the corporation should assemble and submit records of bank accounts and financial statements to the Internal Revenue Service in order to apply for recognition of exempt status.
As a new organization, the corporation may not have a lot of information to share, but its mission, budget, and expected financial income should be disclosed to the IRS. The IRS will then send a document of approval with the exempt status to the corporation. The Employer Identification Number (EIN) and other data will remain the same for the organization.
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