Key Takeaways

  • A non-profit LLC must meet strict IRS guidelines to obtain tax-exempt status, including having only 501(c)(3) members.
  • States that explicitly allow non-profit LLCs include California, Texas, Michigan, Minnesota, Kentucky, Tennessee, North Dakota, and Delaware.
  • Some states use specialized rules, such as Minnesota’s Nonprofit Limited Liability Company Act.
  • A non-profit LLC typically must meet additional requirements like having charitable articles of organization and restrictions on profit distributions.
  • Setting up a non-profit LLC is more complex than forming a traditional LLC and often requires legal expertise.

Non-Profit LLC

Non-profit LLCs are limited liability companies that are designated as not-for-profit for tax purposes.

Non-Profit Designation

All of the members (corporations and individuals) must also be tax-exempt nonprofits. Nonprofit limited liability companies are allowed in some states, for example California, Michigan, Texas and Tennessee. The Internal Revenue Service set forth a mandate, Limited Liability Companies as Exempt Organization Update, that allows for tax-exempt status for LLCs owned by a single tax-exempt nonprofit organization as long as the LLC meets certain criteria. Limited liability companies don’t usually start as a nonprofit organization because of the complexity of the process. All of the members (corporations and individuals) must also be tax-exempt nonprofits.

Key Requirements to Form a Non Profit LLC

Forming a non-profit LLC involves more than just standard LLC formation. Essential requirements include:

  • All Members Must Be Tax-Exempt: Each member must be a 501(c)(3) organization, a government entity, or a wholly-owned governmental instrumentality.
  • Charitable Purpose: The LLC must operate exclusively for charitable, religious, educational, or similar purposes.
  • Prohibitions on Profit Distribution: Profits cannot be distributed to members; instead, earnings must be reinvested in the nonprofit mission.
  • Specific Organizational Language: Articles of organization must include IRS-required language restricting the LLC’s activities to exempt purposes and ensuring charitable asset distribution upon dissolution.
  • State Law Compliance: The LLC must comply with any additional nonprofit-specific rules set by the state of formation​​.

Failing to follow these requirements could result in denial of tax-exempt status or even revocation of that status after formation.

What States Allow Non Profit LLCs?

Not all states allow the formation of a non-profit LLC. States that do allow this structure include:

  • California: Recognizes non-profit LLCs if they are wholly owned by nonprofit organizations and meet strict IRS compliance.
  • Texas: Permits nonprofit LLCs under specific regulations.
  • Michigan: Allows nonprofit LLCs, but requires strict adherence to nonprofit purposes.
  • Minnesota: Offers the Nonprofit Limited Liability Company Act, a dedicated framework for nonprofit LLCs.
  • Kentucky: Permits nonprofit LLCs provided they operate exclusively for charitable or other exempt purposes.
  • Tennessee: Authorizes nonprofit LLCs through provisions within state nonprofit statutes.
  • North Dakota: Allows for nonprofit LLC formation under state law.
  • Delaware: Permits nonprofit LLCs, though special considerations apply for achieving tax-exempt status.

Other states may allow nonprofit-like activities through conventional LLCs, but securing 501(c)(3) status from the IRS for these entities is extremely difficult without clear nonprofit authorization at the state level​.

If you intend to create a non-profit LLC, it’s essential to ensure that your state's laws explicitly allow it and that your organizational documents are carefully drafted to meet both state and IRS expectations. An experienced business attorney can help you with compliance and application strategies.

Twelve Rules that Apply

1. The limited liability company’s documentation must include activities limited to exempt activities.

2. The organizational documents must also be clear that the limited liability company is operated only to further the charitable purposes of its members. 

3. All limited liability company members must be section 501(c) (3) organizations, governmental units or wholly owned instrumentalities of government.

4. Limited liability companies must prohibit any direct transfer of any LLC membership interest to recipients who aren’t 501(c)(3) organizations or governmental instruments.

5. Limited liability companies may only transfer to a nonmember (other than a governmental unit, 501(c)(3) organizations) for fair market value to any other business.

6. When the LLC dissolves, assets devoted to charitable purposes must continue to be devoted to same.

7. Any amendments to the limited liability company’s articles of organization must comply with section 501(c)(3).

8. The limited liability company is prohibited from merging with or converting to a for-profit business.

9. Limited liability company must not distribute any assets to members who then leave the limited liability company.

10. The limited liability company must have an acceptable alternative plan for one of the members failing to continue as a 501(c)(3).

11. Limited liability company must enforce their rights to pursue all remedies under the law to protect the LLC interests.

12. Limited liability company’s documentation and provisions must be in accordance with state law.

The Difference Between a Nonprofit Organization and an LLC

Limited liability companies are simple, which is why they are so very popular. They are formed under state laws with simple filings and few limits on ownership. Alternatively, nonprofits face a mountain of documentation and paperwork to verify their eligible purpose as defined by the IRS. Then there is even more documentation to track funds, donations, earnings, distributions etc…Most states also require a board of directors for nonprofit organizations and for minutes of regular board meetings to be kept.

While a limited liability company can easily make adjustments to changing operating models or conditions, a nonprofit is held to particularly rigid operating practices in order to maintain its nonprofit status. An LLC can also elect how to be taxed, either as a sole proprietorship or as a partnership. A nonprofit can lose its exempt status if the IRS discovers it fails some of its guidelines.

The nonprofit organization has many rules set forth on how it operates and grows, while an LLC can operate in any legal manner that the members see fit. Nonprofit dissolutions are even rife with rules. All assets of a nonprofit must be given to another nonprofit so that they continue in a nonprofit manner.

While LLCs can take on investors and return a percentage of future earnings, nonprofits have to depend on charitable giving for infusions of capital. This may seem obvious but can be a lot more difficult when you are struggling to keep the lights on at your nonprofit.

One thing LLCs and nonprofits have in common is that there is a level of personal asset protection from lawsuits. So, members of both are protected from having their personal assets used to satisfy legal obligations or debts. Limited liability companies are in a better position to pay employees a competitive salary while nonprofits are in a better position to attract employees who are truly committed to its success. You must weigh this distinction as you decide what is best for your organization.

Frequently Asked Questions

1. What is a non-profit LLC?

A non-profit LLC is a limited liability company formed for charitable, religious, educational, or similar tax-exempt purposes, meeting IRS and state nonprofit requirements.

2. What states allow a non-profit LLC?

States explicitly allowing non-profit LLCs include California, Texas, Michigan, Minnesota, Kentucky, Tennessee, North Dakota, and Delaware​.

3. Can individuals own a non-profit LLC?

No, typically only other nonprofit entities, government units, or wholly owned government instrumentality members can own a non-profit LLC​.

4. How do you get 501(c)(3) status for an LLC?

You must file IRS Form 1023 and meet strict ownership, purpose, and organizational document requirements to obtain 501(c)(3) tax-exempt status as an LLC​.

5. What happens if a non-profit LLC dissolves?

If a non-profit LLC dissolves, its remaining assets must be distributed to another 501(c)(3) organization or a government entity to maintain compliance​.

If you need help with any limited liability company nonprofit issues or any legal need, 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.