Can an LLC Be a Nonprofit?

Starting a nonprofit to advance a charitable mission is noble, but it’s also a business process. Most non-profits are structured as corporations, but limited liability companies (LLCs) can also be nonprofits. However, jumping through a few hoops may not be the best option.

Read on to learn what’s involved in starting a nonprofit LLC and why it might not be the best choice for you and your business. 

What Is an LLC?

An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so your assets are not at risk if your business is sued or cannot pay its debts. 

An LLC is considered a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns. 

LLCs also offer flexibility in management, as there are few requirements regarding organizational structure.

What Is a Nonprofit?

Nonprofits are formed to provide public services, such as combating climate change or reducing poverty. Legally, a nonprofit must have a goal that relates to one of the following types of causes: 

• Scientific
• Educational
• Literary or cultural 
• Social
• Charitable
• Testing for public safety
• Children cruelty-prevention
• Animal cruelty-prevention 
• Religious
• Foster national/international amateur sports 

Nonprofits are funded mainly by donations, driven by fundraising events. Since nonprofits work toward the common good, nonprofits are eligible for tax-exempt status. 

Nonprofits are usually structured as corporations. But to qualify as a nonprofit, it can be structured as a corporation, trust, or association. Eligible organizations must apply for 501(c)(3) tax-exempt status through the IRS.

Non-Profit LLCs

For an LLC to obtain federal tax exemption, it must apply for 501(c)(3) status. However, nonprofit LLCs are only allowed in some states, and even to use, the LLC must satisfy specific requirements. 

In most states, an LLC can apply for nonprofit status of:

• The LLC is owned by a member who is a 501(c)(3) organization, not an individual or profit-minded business entity. 
• Two or more members that are 501(c)(3) organizations own the LLC.
• The LLC can file IRS Form 1023, which contains a test to determine if the LLC is eligible for tax-exempt status. 

The IRS requires all LLCs applying for 501(c)(3) status to provide copies of critical documents, including the articles of organization and the operating agreement. Then, the information within these documents must satisfy the following requirements: 

• The articles of organization and the operating agreement must specify and limit the purpose of the LLC to at least one the IRS has deemed to be charitable.
• The articles of organization and the operating agreement must specify that the LLC’s assets are officially and permanently committed to charitable, tax-exempt purposes.
  • A dissolution clause must also be included. 
• LLC operations and activities must be characteristic of the effort to advance the LLC’s specified charitable purpose.
• All provisions in the LLC documents must be consistent with state law.
• The rights of the 501(c)(3) member or members must be protected.

In Closing

Gaining nonprofit status for an LLC is a complicated process, which is why most nonprofits are corporations. Therefore, making your nonprofit an LLC rather than a corporation has no real benefit. 

But if you’re still in doubt, speak with your tax advisor about which structure is best for your nonprofit and charitable cause.