Can an LLC be nonprofit? Can an LLC become a 501(c)(3) tax-exempt status?
We explain the options and limitations for running an LLC as a nonprofit organization.
If you’re thinking of starting a charitable organization, you may be asking yourself, “Can an LLC be a nonprofit?” Let’s dive into this question and discuss the feasibility and options for creating a limited liability company (LLC) that functions similarly to non-profit organizations.
While it’s possible to create an LLC as a nonprofit, most nonprofit organizations are set up as nonprofit corporations. One reason is that, under IRS rules, a nonprofit LLC has to be entirely owned by a tax-exempt organization, making the process of creating one more complex than forming a nonprofit corporation. In fact, only a few states allow for the creation of nonprofit LLCs (Minnesota, Kentucky, North Dakota, and Tennessee; Texas doesn’t recognize the term “nonprofit LLC,” but does allow for the formation of an LLC with a nonprofit purpose). The IRS also has a long list of criteria for an LLC to qualify as a nonprofit.
A nonprofit LLC is similar to a for-profit LLC. Nonprofit LLCs provide limited liability protection of personal assets for the business owners (unlike sole proprietorships), just as corporations do, but they’re far more flexible in how they’re organized and run. They also have fewer reporting requirements.
What differentiates a nonprofit LLC is that its purpose is not to make money, but to serve the public good in some way. Another important difference between it and a regular for-profit LLC is that it must be owned entirely by a tax-exempt organization.
A nonprofit corporation is a corporation created to serve charitable purposes. It has no stock or shareholders, so it can’t be bought or sold. Any profits made by the nonprofit corporation go toward the corporation’s mission or are used to keep the corporation running.
Both nonprofit LLCs and nonprofit corporations can apply for 501(c)(3) Status with the federal government to avoid being federally taxed. Depending on the state, they may be able to apply for an exemption to state taxes, as well.
The IRS can grant 501(c)(3) status to a nonprofit if it meets the necessary criteria. This status means that the nonprofit does not have to pay federal income tax. To get 501(c)(3) status, an organization must meet all the IRS’s guidelines and be formed for charitable, religious, scientific, literary, or educational purposes or for testing for public safety, fostering national or international amateur sports competition, and/or preventing cruelty to children or animals.
Forming a nonprofit LLC requires following a specific process. First, you would need to incorporate as a tax-exempt organization (if you haven’t already done so), because a nonprofit LLC must be entirely owned by a tax-exempt entity. Then, that organization would need to follow your state’s rules for creating an LLC, usually by filing Articles of Organization.
From there, your nonprofit LLC will need to meet the 12 requirements for nonprofit LLCs established by the IRS. You can find these listed on the IRS’s website.
Another difficulty you may face in forming a nonprofit LLC is that certain states (California, Indiana, Iowa, Maryland, Minnesota, New York, North Dakota, Rhode Island, Texas, Utah, Virginia, and the District of Columbia) seem to require that an LLC be formed for a business purpose. It’s possible that, if you’re forming your nonprofit LLC in one of those states, you may meet some legal resistance, although this hasn’t been determined by the courts yet.
If you’re going to be forming a nonprofit LLC, it’s essential that you file IRS Form 1023 or IRS Form 1023-EZ in order to apply for federal tax-exempt status. Your state may require you to file a separate form for state tax exemption.
As with a non-profit corporation, forming a nonprofit LLC can limit the personal liability of its members. It also avoids many of the requirements for a corporation, such as having regular meetings, extensive record-keeping on those meetings, complex organizational documents, and electing a board of directors.
That being said, those advantages may be offset by having to first create a separate tax-exempt organization to own the nonprofit LLC.
For the reasons above, forming a nonprofit corporation is a simpler process than starting a nonprofit LLC. Each state has its own rules for forming a corporation, but most of them include choosing a unique name, appointing directors, naming a registered agent, filing Articles of Incorporation, drafting corporate bylaws, getting an Employer Identification Number (EIN) from the IRS, and filing for 501(c)(3) status.
Although ZenBusiness doesn’t help with nonprofit formations at this time, we have many other business services that can help your nonprofit succeed. We can help you secure a registered agent, get an EIN, get a domain name, build a website, determine what business licenses and permits you need, and more. Contact us today to see how we can help.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
An LLC is a legal business entity that exists separately from its owners to shield them from personal liability if the business is sued or goes into debt. 501(c)(3) refers to a tax-exempt status from the IRS for nonprofit organizations. A corporation or an LLC can obtain this tax-exempt status only if it meets all the IRS criteria.
These types include public charities, private operating foundations, and private foundations. All of these fall under the 501(c)(3) nonprofit organization umbrella, with private operating foundations being the least common of the three categories.
“501 LLC” might refer to a nonprofit LLC with 501(c)(3) status, meaning that it’s exempt from federal taxes.
If your LLC is owned entirely by a tax-exempt organization and you meet the IRS’s criteria for nonprofit LLCs, you may be able to convert your LLC into a nonprofit, provided your state allows nonprofit LLCs. However, it may be far easier to start a new organization as a non-profit corporation. An attorney familiar with nonprofit laws may be able to guide you.
While that may depend on your situation and preferences, most nonprofit organizations are set up as nonprofit corporations. A business attorney can give you more specific guidance.
Most nonprofits are set up as nonprofit corporations. That’s largely because the corporate structure shields the founders from personal liability. A nonprofit LLC can do the same, but it’s much more complicated to set up (for the reasons outlined earlier).
A low-profit LLC, also known as an L3C, is a relatively new type of LLC that serves a public benefit while still being a for-profit business entity, somewhat similar to a public benefit corporation (PBC). An L3C can’t be formed for legislative or political activities. At the time of this writing, only Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and Wyoming have L3C statutes.
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