Can an LLC be a Nonprofit?

Can A Nonprofit Be An LLC?

Nonprofit organizations are typically corporations. However, can a nonprofit be an Limited Liability Company (LLC)? The answer is: If your LLC fits into a very specific category.

Your LLC has to be:

• Owned by a non profit organization.
• In a state,which recognizesn “Nonprofit LLCs” .
• It meets the 12 requirements set forth by the IRS mandate called: “Limited Liability Companies as Exempt Organization Update”.

In a scenario where you could meet these 3 conditions, then you can be both an LLC and a nonprofit aka a “nonprofit LLC”.

Due to the high difficulty of having your LLC meet these requirements, most people don’t make their LLCs into nonprofits. Just think about it. You, as the owner of the LLC nonprofit, would have to form yourself as a tax-exempt nonprofit organization. Only then, would you be able to make your LLC into a nonprofit.

To make this already crazy situation worse, if more than one member has units in your LLC, then each of the members would have to form themselves as a tax-exempt nonprofit organization.

The reason why you, as the owner of the LLC, would have to incorporate yourself as a tax-exempt nonprofit organization is because specific individuals or entities cannot own nonprofits – unless the owner of the nonprofit is a nonprofit as well.

Only nonprofits can own nonprofits, as subsidiaries. For this reason, in order to make a “nonprofit LLC”, you need to make sure that the members (of the LLC) are already tax-exempt nonprofit organizations.

To summarize: the concept of “nonprofit LLC” does indeed exist. However, due to its extreme difficulty to form, most people choose the simple option, a nonprofit corporatio

What States Allow Non Profit LLCs?

To be honest, in most states, an LLC cannot be a non-profit. However, there are 5 states that allow non-profit LLCs.

The 5 states are:

1. Minnesota
2. Kentucky
3. North Dakota
4. Tennessee
5. Texas

You will need to make sure you are in a state where they recognize “nonprofit LLCs” in order to make your LLC into a nonprofit. Other states may have other variations of the “nonprofit LLC”. Therefore, be sure to check in with your state’s rules and regulations.

How Do I Turn My LLC Into A Nonprofit?

In order to turn your LLC into a non-profit, assuming you are in a state that recognizes “nonprofit LLCs”, you will need to file LLC articles of organization with the office of your secretary of state. After that, you will need to pay the state filing fee. Only then, will you be able to go through the usual process of getting your nonprofit licensed and registered with the appropriate state and local agencies. However, just because you accomplished getting this far, it does not mean you accomplished becoming a nonprofit on a federal level.

Instead, up until this point, you have only accomplished becoming a “nonprofit LLC” on a state level. Becoming a state-recognized “nonprofit LLC” does not guarantee your LLC becoming a “501(c)(3) LLC” or becoming a tax-exempt entity on a federal level. In order to get this done, you will need to comply with IRS’s 12 conditions for LLCs that want federal tax exemption. Only then, will your LLC successfully become a complete nonprofit LLC, even on a federal level.

It is pretty ironic because the opposite is true as well. If your LLC is not located in a state,which recognizes “Nonprofit LLCs”, then the IRS can still treat your LLC as a “nonprofit LLC” in terms of federal taxes; your LLC can still become a “501(c)(3) LLC”.

How and when does the IRS recognize your LLC as a “501(c)(3) LLC”, on a federal level? We’ll cover that next. Keep reading!

Can An LLC Be A 501(C)(3)? What The IRS Requires

Yes! It is possible for the IRS to recognize your LLC with a 501(c)(3) tax status.

When you ask “Can an LLC be a nonprofit?”, you essentially want your LLC to be a tax-exempt business entity, the same way a nonprofit is tax-exempt. In order for this to happen, you need your LLC to have 501(c)(3) tax status. The reason for this is because nonprofits are essentially business entities which applied for 501(c)(3) tax status. This is what we call on a daily basis, a non-profit. For this reason, your LLC, which you want to be a nonprofit, at the end of the day needs to have the 501(c)(3) tax status.

Ultimately, the ones who decide whether or not your LLC qualifies to be a “LLC nonprofit”, are the IRS. Aside from the law that every member of the LLC must be a tax-exempt entity and that you are in a state where they recognize “nonprofit LLCs”, there is a third condition.

There are 12 conditions that your LLC must meet in order for the IRS to recognize your LLC with the 501(c)(3) status.

12 IRS Rules For An LLC To Be A Nonprofit

Rule #1 for 501(c)(3)

The organizational documents must include a specific statement limiting the LLC’s activities to one or more exempt purposes.

Rule #2 for 501(c)(3)

The organizational language must specify that the LLC is operated exclusively to further the charitable purposes of its members.

Rule #3 for 501(c)(3)

The organizational language must require that the LLC’s members be section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof (“governmental units or instrumentalities”).

Rule #4 for 501(c)(3)

The organizational language must prohibit any direct or indirect transfer of any membership interest in the LLC to a transferee other than a section 501(c)(3) organization or governmental unit or instrumentality.

Rule #5 for 501(c)(3)

The organizational language must state that the LLC, interests in the LLC (other than a membership interest), or its assets may only be availed of or transferred to (whether directly or indirectly) any nonmember other than a section 501(c)(3) organization or governmental unit or instrumentality in exchange for fair market value.

Rule #6 for 501(c)(3)

The organizational language must guarantee that upon dissolution of the LLC, the assets devoted to the LLC’s charitable purposes will continue to be devoted to charitable purposes.

Rule #7 for 501(c)(3)

The organizational language must require that any amendments to the LLC’s articles of organization and operating agreement be consistent with section 501(c)(3).

Rule #8 for 501(c)(3)

The organizational language must prohibit the LLC from merging with, or converting into, a for-profit entity.  

Rule #9 for 501(c)(3)

The organizational language must require that the LLC not distribute any assets to members who cease to be organizations described in section 501(c)(3) or governmental units or instrumentalities.

Rule #10 for 501(c)(3)

The organizational language must contain an acceptable contingency plan in the event one or more members ceases at any time to be an organization described in section 501(c)(3) or a governmental unit or instrumentality.  

Rule #11 for 501(c)(3)

The organizational language must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interests in the LLC.

Rule #12 for 501(c)(3)

The LLC must represent that all its organizing document provisions are consistent with state LLC laws, and are enforceable at law and in equity.

Low Profit Limited Liability Companies

If you are not interested in forming a nonprofit corporation or nonprofit LLC, you may be interested in forming a low-profit LLC (or L3C).

A low-profit LLC / L3C is a for-profit LLC that follows 3 conditions that the IRS imposed.

1. It significantly improves the accomplishments of at least one charitable or educational purpose within the meaning of Sec. 170(c)(2)(b) of the Internal Revenue Code.
2. The low-profit LLC values the charitable cause more than the profit. The charity needs to be the primary objective of the company.
3. It does not have a political or legislative agenda that they want accomplished.

If your business meets these 3 conditions, then your LLC can be a L3C. It is important to know, however, that a L3C is not a tax-exempt entity.

Your LLC will still be allowed to make profits from various investments. This concept is called a program-related investment (PRI).

Conclusion

You want to know – “Can an LLC be a nonprofit?”. The answer is yes, it is possible. However, the process of making this happen is very sophisticated. For this reason, you won’t be able to find a lot of “nonprofit LLCs” around.