Starting a Nonprofit LLC: Overview

Starting a nonprofit LLC (limited liability company) can be noble and altruistic; however, it can also be complicated and legally tedious because the concept of nonprofit LLC is unique. 

Often, the goal of establishing an LLC is to make a profit, yet to be eligible to receive tax-free charitable contributions, a group needs to incorporate as a nonprofit organization (which is a legal structure an association requires to be constitutionally exempted from taxes). The combination of these two ideas typically leads to too many obstacles to navigate when starting a nonprofit LLC.

To exist as a nonprofit LLC, an LLC must meet two conditions: (a) the LLC must be entirely owned by the single tax-exempt nonprofit organization and (b) the LLC must abide by 12 regulations written in the IRS mandate “Limited Liability Companies as Exempt Organization Update.” Regardless of how daunting and complex most people find meeting these stipulations, a nonprofit LLC still enjoys many benefits, including those denied a traditional for-profit company.

Advantages of Incorporating as a Nonprofit LLC

Despite the difficulties of starting a nonprofit LLC, it enjoys many perks, such as:

  • Limited liability protection: Because it is a limited liability, a nonprofit LLC receives legal protections similar to those enjoyed by traditional limited liability companies. As a result, the trustees and directors (and other stakeholders) of a nonprofit LLC are not liable for corporate liabilities. Simply put, a nonprofit benefits from legal protections that separate owners' and directors' personal assets from debts incurred by the corporation.
  • A better chance of receiving federal grants and donations from private foundations: Due to the selflessness of not-for-profit projects, a nonprofit organization is well placed to receive funding from both the federal government and private institutions.
  • Continuation of philanthropic projects: A director's demise or exit from the firm will not end the business's operations, meaning a nonprofit LLC's activity is continuous.
  • Exemption from several federal and state taxes: Once a nonprofit LLC meets certain legal obligations (such as filing the relevant IRS forms), its owners could file for tax-exempt status, thus excluding the corporation from meeting certain tax commitments required of a conventional for-profit LLC.

Tax Exemption Bureaucracies: A Nonprofit LLC Obligations to the IRS

The most common nonprofit status that organizations seek is the IRS's 501(c) tax-exempt status. However, to qualify for one, a corporation must satisfy all of (but not limited to) the following conditions:

  • A nonprofit LLC must provide an exact statement that explicitly limits the company's activities to one or more tax-exempt objectives. In other words, a nonprofit seeking tax exemption cannot participate in activities that do not fall under the IRS's tax-exempt pursuits. These objectives must be stated in the "Organizational Documents" (which is a document you will file when starting a tax-exempt nonprofit).
  • The language used in the Organizational Documents (called "Organizational Language") must affirm that the LLC operates exclusively to promote its members' charitable purposes.
  •  The LLC's Organizational Language must forbid any direct or indirect transfer of an LLC membership interest to a recipient other than a nonprofit (a section 501(c)(3) organization, as defined by the IRS) or to a governmental entity.
  • Based on the entry of the Organizational Language, an LLC cannot merge with, become, or convert into a for-profit business unit. 

Regardless of a nonprofit's tax-exempt status, its owner is still required to file Articles of Incorporation with the authorities of the state in which the company hopes to incorporate. 

Steps for Starting a Nonprofit LLC

  1. An owner aspiring to start a nonprofit that is 501(c)(3)-qualified must form a corporation.
  2. He or she must complete either an IRS Form 1023 or IRS Form 1023EZ. After the completion of this form, the IRS issues an owner a tax determination letter.
  3. Upon receiving the letter, the nonprofit's donors can deduct their donations as charitable contributions on their personal tax returns.
  4. Then, the owner could decide to establish a subsidiary LLC to hold and separate assets from those of the parent nonprofit corporation.

Above all, because incorporating a nonprofit as an LLC is highly unusual, its legal requirements are so complex that only topnotch lawyers typically understand the full process. That's the reason it is important you seek the proper guidance to simplify your already-challenging task. 

So, to obtain excellent assistance to start your honorable and benevolent project, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. In fact, lawyers on UpCounsel are from world-renowned law schools such as Harvard Law and Yale Law, and each UpCounsel lawyer has an average 14 years of legal experience, including working with or on behalf of multinational corporations like Google, Airbnb, Stripe, and Twilio.