Updated November 4, 2020:

A single-member nonprofit corporation is a corporation that has been established for charitable purposes and has only one owner.

Facts About Single-Member LLCs

When you create a single-member limited liability company (LLC), you are establishing a legal entity that is completely separate from its owners. With a single-member LLC, the owner of the company is personally shielded from the company's liabilities. It's important to note, however, that the IRS treats single-member LLCs as disregarded entities.

If you are forming a nonprofit single-member LLC, the IRS will treat your company as a division of the parent charitable organization, which means your organization will not need to file either Form 1023 or Form 990.

The main reason that a tax-exempt organization would form a single-member LLC is to handle an activity related to the charity while protecting the parent organization from the possible liabilities that may result from the activity. A single-member LLC can also be used to establish separate record-keeping and management for a charitable activity.

A benefit of using a single-member LLC for an activity related to a charitable organization is that there is no requirement for a separate exemption determination. Obtaining these determinations can be very expensive, so forming a single-member LLC is a cost-effective way for charitable organizations to handle some of its activities.

Using an LLC for Tax-Exempt Organizations

Another advantage of a single member nonprofit LLC is that the IRS considers donations to the LLC as donations to the parent organization, making acknowledging and disclosing these donations much easier.

Virtually every nonprofit enterprise can benefit from using LLCs. With an LLC, a nonprofit can accomplish several tasks related to its activities:

  • Reorganizing activities
  • Promoting activities
  • Isolating a specific activity

A nonprofit can use an LLC to limit its chances for a loss from an activity that is inherently risky. LLCs can also be used to allow the nonprofit to enter into a joint venture with a for-profit organization without risking the nonprofit's tax-exempt status.

In 1998, rules were issued by the IRS to help nonprofits understand when they could use an LLC for the purpose of a joint venture. The IRS guidelines describe both good and bad situations, with the latter covering joint ventures that could cause the loss of tax-exempt status.

Joint ventures don't necessarily need to include both a nonprofit and for-profit organization. Two nonprofit organizations, for example, could become members of an LLC for the purpose of acquiring a government contract.

The IRS and Single-Member LLCs

Since 1999, the IRS has treated LLCs wholly owned by a tax-exempt organization as a disregarded entity. Basically, this means that the member of the LLC is responsible for the LLCs activities. When owned by a tax-exempt organization, a single-member LLC is also considered to be exempt because of the parent and subsidiary relationship. The parent charitable organization receives its tax-exempt status through a determination letter sent by the IRS and the subsidiary LLC is exempt because it is owned by the charitable organization.

The single-member LLC of a tax-exempt organization is also exempt from FUTA. When a donation is made to a single-member LLC owned by a charity, the donation is considered a contribution to the actual charity and not the LLC.

Parent organizations are required to report the activities of their single-member LLCs on Form 990. In terms of tax reporting, the single-member LLC is treated as if it were a department of the parent charity instead of being treated as a separate organization.

The transparency for nonprofit single-member LLCs required to the IRS also extends to the state level. For instance, the property owned by a single-member LLC will be exempt from property taxes in the same way that property owned by the parent organization would be exempt. If you live in a state with these rules, you can transfer property from your parent organization to your LLC without losing your property tax exemption.

To make sure you maintain the tax-exempt status of your single-member LLC, you need to be sure that the organization is only engaged in exempt activities, and that your organizational documents state that your organization will only participate in these activities.

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