Key Takeaways

  • California allows nonprofit LLCs but only under specific conditions, such as being organized and operated exclusively for charitable or public purposes.
  • A nonprofit LLC in California must be member-managed and all members must be tax-exempt organizations.
  • The LLC must include IRS-compliant language in its Articles of Organization to qualify for tax exemption.
  • Filing Form 3500A with the California Franchise Tax Board is required for state tax exemption.
  • Form 1023 or 1023-EZ must be filed with the IRS to obtain federal 501(c)(3) status.
  • Key restrictions include prohibition on private inurement and limits on political activity.
  • Bylaws and an operating agreement should clearly reflect nonprofit purposes and restrictions.

A non-profit LLC California entity is a legal business structure comprised of a group or association to make the business eligible for tax exemption. When comparing a limited liability company to a non-profit business, the main difference is the non-profit has obtained tax-exempt status and it serves the public interest. 

Information for Forming a California Non-Profit LLC

  • To form a California non-profit, you must first form a non-profit corporation following Section 5000 et.seq. of the California Corporations Code.
  • Most non-profits are formed for a specific reason such as educational, charitable, literary, religious, or scientific purposes, which makes the non-profit eligible for state and federal tax exemptions. They are filed as are 501(c)(3) organizations.
  • Choose the initial directors for the non-profit. California law states a non-profit board of directors may have only one director. The IRS, on the other hand, is unlikely to grant an organization 501(c)(3) status as a non-profit that has only one director. Most non-profits have multiple directors ranging from three to 25 in the role.
  • The individuals who are chosen to serve as directors should fully understand their duties and responsibilities, which includes acting in the best interests of the organization while providing guidance and oversight to the activities of the organization, its officers, the finances, and staying in compliance with the law.
  • Select a name for your California non-profit.
  • California allows the adoption of a name if it is not too similar to a name already registered with the Secretary of State of California and as long as the name is not misleading to the public.
  • It must not infringe on the trademark rights of another person. To check this, run a search at the U.S. Patent and Trademark website or use one of the search engines. You may want to confer with an attorney to ensure you are not infringing on the rights of another person and to protect your own rights from other parties.
  • Use the Business Search option on the Secretary of State (SOS) website to check name availability. While this serves as a way to check, it is not official. You may also mail a Name Availability Inquire letter to the SOS.
  • It's possible to secure the name by reserving it by filing a Name Reservation Request. The name is reserved for 60 da, ys during which time another corporation will not be able to register the same name.
  • Prepare the articles of incorporation for your non-profit. The articles contain basic information about the non-profit. It also includes an area to state the purpose of the non-profit. Providing a broad and thorough purpose for the non-profit lessens the need for amendments to the articles of incorporation in the future.
  • To receive tax-exempt status from the Internal Revenue Service and the state, the articles must contain certain language. This includes the statement of purpose that must meet the requirements of the IRS; a statement the non-profit will not be part of any prohibited legislative or political activity; a provision for assets upon dissolution; and the organization of the non-profit upon dissolution.
  • Create a set of bylaws in compliance with California law. The bylaws will cover such things as the basic provisions for the management practices of the non-profit's activities as well as the affairs of the corporation. If the non-profit has members with the authority to vote, include provisions regarding their rights and processes.
  • It is not necessary to file the bylaws with the Secretary of State. They are for internal record keeping.
  • File the articles of incorporation along with the applicable fee with the Secretary of State.
  • Apply for an Employer Identification Number (EIN) from the IRS.
  • File the Application for Recognition of Exemption, Form 1023, with the IRS. This form must be filed to obtain federal tax-exempt status. The current filing fee for Form 1023 is $850 for all organizations except for those considered small. The smaller organizations have projected annual gross receipts of less than $50,000 and $250,000 in total assets. Organizations considered smaller are eligible to use Form 1023-EZ for filing.
  • File for the California state tax exemption. Do this at the State of California Franchise Tax Board website using Form 3500A. 

Common Reasons to Form a Nonprofit LLC

Organizations may choose the LLC structure for a nonprofit in California for several strategic reasons:

  • Joint Ventures: Two or more nonprofits may form a nonprofit LLC to jointly manage a program or share resources.
  • Liability Protection: LLCs offer a layer of liability protection for members without forming a separate nonprofit corporation.
  • Operational Flexibility: LLCs allow for flexible internal management and less formal governance than traditional corporations.
  • Collaborative Initiatives: A nonprofit LLC can streamline project-specific partnerships between exempt organizations.

While forming a nonprofit LLC can be beneficial, it adds complexity in compliance. Consulting with an attorney experienced in nonprofit formation is advisable. You can find a qualified attorney through UpCounsel.

Tax-Exempt Status and Ongoing Compliance

In addition to formation, maintaining nonprofit status for an LLC in California involves:

  • Federal Tax Exemption:
    • File Form 1023 or 1023-EZ with the IRS to receive 501(c)(3) status.
    • Include supporting documentation such as the Articles of Organization and Operating Agreement.
  • California State Tax Exemption:
    • After receiving federal exemption, file Form 3500A with the California Franchise Tax Board.
    • Smaller organizations can use the streamlined Form 3500A, but larger nonprofits must use the more detailed Form 3500.
  • Annual Filings and Reports:
    • File Form RRF-1 with the California Attorney General's Registry of Charitable Trusts.
    • File IRS Form 990 annually (or 990-EZ/990-N depending on the nonprofit’s size).
    • File Form SI-100 with the California Secretary of State every two years.

Additional Requirements for a Nonprofit LLC in California

To ensure compliance and eligibility for tax-exempt status, a California nonprofit LLC must meet the following additional criteria:

  1. IRS-Approved Language in Articles
    The Articles of Organization must include:
    • A specific purpose clause meeting the IRS’s exempt purposes.
    • A clause stating that the LLC will not participate in prohibited political or legislative activity.
    • A clause stating that assets will be distributed to another 501(c)(3) organization upon dissolution.
  2. Member Restrictions
    • All members must be 501(c)(3) organizations or governmental units.
    • Individuals, for-profit entities, or unqualified organizations cannot be members of a nonprofit LLC.
  3. Prohibition on Private Inurement
    • The LLC must not allow any portion of its earnings to benefit private shareholders or individuals.
    • Compensation to officers and members must be reasonable and based on fair market value.
  4. Operating Agreement
    • The LLC should have an operating agreement that explicitly affirms the nonprofit nature of the entity.
    • It should outline how decisions are made, member roles, and how profits and assets are used or distributed.
  5. Bylaw-Like Governance Structure
    • While not always required to file with the state, bylaws (or similar governance documents) help clarify internal operations and compliance with nonprofit regulations.

Can an LLC Be a Nonprofit in California?

Yes, an LLC can be a nonprofit in California, but this structure is subject to strict legal conditions. California law permits the formation of a nonprofit LLC, provided it is formed exclusively for charitable or public purposes, and its structure and operations comply with both state law and IRS requirements for tax-exempt status.

To qualify:

  • All members of the LLC must be recognized tax-exempt organizations under Internal Revenue Code section 501(c)(3).
  • The LLC must be organized and operated exclusively for exempt purposes, such as religious, charitable, scientific, literary, or educational activities.
  • The Articles of Organization must include language required by the IRS for tax exemption, including a clause ensuring that the LLC's assets are used solely for exempt purposes and a dissolution clause directing assets to another 501(c)(3) organization.

This structure is often used by existing nonprofits that wish to collaborate or jointly operate programs while maintaining liability protection.

Frequently Asked Questions

  1. Can an LLC be a nonprofit in California?
    Yes, but only if it meets strict legal and IRS requirements, including being organized exclusively for charitable purposes and having only tax-exempt members.
  2. What are the IRS rules for a nonprofit LLC?
    The LLC must include specific language in its Articles of Organization, limit its members to 501(c)(3) organizations, and avoid political activities or private inurement.
  3. Do I need bylaws for a nonprofit LLC?
    Although not legally required to file bylaws with the state, a written operating agreement or bylaws are essential for internal governance and compliance.
  4. What forms are needed to get tax exemption in California?
    File IRS Form 1023 or 1023-EZ for federal tax exemption and Form 3500A with the California Franchise Tax Board for state exemption.
  5. Why form a nonprofit LLC instead of a nonprofit corporation?
    A nonprofit LLC offers liability protection and operational flexibility and is often used for joint ventures between existing tax-exempt entities.

If you need help with a non-profit LLC in California, you can post your legal need 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.