Short answer? Yes, an LLC can be a Non-Profit but we're not going to lie, it can get a bit complicated. In order to understand how this atypical situation happens, it's important to dive into the how and why.
LLC's aren't usually formed as nonprofit (or tax-exempt) organizations mostly because people usually find the process a lot more taxing (no pun intended) than just forming as a nonprofit corporation...and they're not wrong so let's break this down.
A limited liability company (LLC) or a Low-Profit LLC can exist as a nonprofit limited liability company IF the LLC is completely owned by the single tax-exempt nonprofit organization AND the LLC meets a dozen requirements as set forth in an IRS mandate called: “Limited Liability Companies as Exempt Organization Update.”
In order for the company to be an LLC, all of the members (owners) of the LLC nonprofit must also be tax-exempt nonprofit organizations themselves, this type of setup doesn't make a lot of sense for individuals that wanted to start a nonprofit. Each owner would have to incorporate as a nonprofit corporation and then form the tax-exempt nonprofit. It makes more sense for a group of nonprofit corporations to form together as a tax-exempt, nonprofit LLC, but even that is uncommon.
When you are forming an LLC nonprofit, the IRS will make the final decision about your tax-exempt status. As mentioned above, each member of the LLC must be a tax-exempt nonprofit organization, while making sure the following rules also apply:
Important Note: Just like with a nonprofit corporation, the organizing documents used to form an LLC must declare the mission as one that advances a charitable purpose.
The conditions are:
- Organizational documents (the documents filed when you are starting a tax-exempt nonprofit) must include an exact statement limiting LLC activities to one or more exempt objectives.
- The language in your organizational documents must state clearly that the LLC be operated exclusively to further charitable purposes of its members.
- Organizational language must require LLC members to be section 501(c)(3) organizations (nonprofit organizations), governmental units (associated with government related activities), or wholly-owned instrumentalities of a state or political subdivision of it (similar to governmental units).
- Organizational language must prohibit any direct (or indirect transfer) of any LLC membership interest to a recipient other than a section 501(c)(3) organization or to a governmental unit.
- Organizational language must state that the LLC (interests in the LLC or its assets), may only be transferred to a nonmember other than a 501(c)(3) organization, governmental unit, or instrumentality in exchange for fair market value. In other words, LLC interests must be sold for fair market value to any other business that is not one of those described as a 501(c)(3) organization, governmental unit, or instrumentality.
- Organizational language must guarantee that upon dissolution of the LLC, the LLC assets devoted to charitable purposes will continue to be devoted only to charitable purposes.
- Organizational language must require any amendments to LLC articles of organization to be consistent with section 501(c)(3).
- Organizational language must prohibit the LLC from merging with, becoming, or converting into, a for-profit business entity.
- Organizational language must require that the LLC not distribute any assets to members who cease to be organizations - described in section 501(c)(3), governmental units, or instrumentalities.
- Organizational language must contain an acceptable contingency plan in the event one (or more) members ceases to be a 501(c)(3), governmental unit, or instrumentality.
- Organizational language must state that the LLC exempt members will enforce all of their LLC rights to pursue all legal and equitable remedies to protect LLC interests.
- Organizing document provisions must be consistent with state LLC laws, and enforceable at law and in equity.
If you can meet all of these requirements when starting your nonprofit, the IRS may allow you to form a nonprofit LLC. If you are considering forming a nonprofit LLC, you may also want to speak with an attorney first. There's a lot of language in those conditions that can not only seem overwhelming but is intentionally very specific. A lawyer will not only be able to guide you through this process but also break this down for you even more so that you understand the ins and outs as much as possible or as little as possible depending on how involved you want to be. It's also important to note that as always, there are state regulations that should be kept in mind depending on where your nonprofit LLC is based.
State Information Concerning Nonprofit LLCs
Before you begin trying to form an LLC, you should first check your state laws and regulations to determine if your business structure will qualify for a nonprofit organization.
If you still have more questions or need to seek legal advice, Mission Counsel is here to help! Our clients are organizations serving on the front lines of making our community and world a more equitable, just, and enjoyable place. These clients deserve the same world-class legal counsel normally reserved only for those organizations large enough to afford the big traditional law firms. Click here to schedule a free 15-minute Mission Discovery Session with us.