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.

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.

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.