The concept of a Non-profit Limited Liability Company (LLC) may seem like an oxymoron. Still, it is possible to form a Limited Liability Company that qualifies as a 501(c)(3) tax-exempt organization.

Can an LLC be a nonprofit entity? (it depends)

A Limited Liability Company can be a nonprofit organization, but only in limited circumstances.

In order to qualify to be a non-profit LLC, the state must first allow it, and then (as per the IRS), the non-profit LLC must be wholly owned by an already tax-exempt, non-profit entity.

Said another way, not just anybody can form a non-profit LLC. Only existing non-profit organizations can form a non-profit LLC as a subsidiary.

But let’s back up and first go over some basics:

An LLC is a type of business structure that combines aspects of both corporations and partnerships.

As a corporation, an LLC protects its owners from being personally liable for business debts and liabilities. And as a partnership, an LLC is relatively easy to form and maintain.

Because an LLC is such a flexible business structure, it can be adapted to meet the needs of various businesses, including nonprofit organizations.

If you’re considering starting a nonprofit LLC business in Georgia or any other state, it’s essential to understand the process and requirements involved. This article will explain what you need to do to form a nonprofit LLC in the United States.

What is a nonprofit LLC?

The term “nonprofit” generally refers to an organization that uses its surplus revenues to achieve its goals rather than distributing them as profit or dividends.

To qualify as a nonprofit organization under federal tax law, an LLC must meet the requirements of the Internal Revenue Code. One of the most common being 501(c)(3).

501(c)(3) Organizations

To be recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, your LLC must be organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes or the prevention of cruelty to children or animals.

The term “charitable” is broadly construed and includes providing relief materials to the poor and distressed or the advancement of religion.

To be recognized as exempt from federal income tax, an LLC must apply to the IRS for recognition of exemption.

The process for applying for recognition of exemption is outlined in Revenue Procedure 2018-5, as amended:

“An LLC seeking recognition of exemption must file Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code if it meets the eligibility requirements outlined in that revenue procedure, or Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, if it does not meet those requirements.“

An LLC that has applied for and received recognition of exemption from the IRS as a section 501(c)(3) organization is subject to certain restrictions. Among other things, a section 501(c)(3) organization must not engage in political campaign activity and must not attempt to influence legislation as a substantial part of its activities.

In addition, a section 501(c)(3) organization must not be organized or operated for the benefit of private interests, and no part of its net earnings may inure to the use of any private shareholder or individual.

Advantages of a nonprofit Limited Liability Company

There are several advantages to setting up a nonprofit LLC:

Limited liability: As with an LLC, the owners of a nonprofit LLC will have limited personal liability for debts and obligations of the LLC. If the LLC is sued or cannot pay its debts, the parent company’s assets will not be at risk.

Flexibility: Nonprofit LLCs have more flexibility than traditional nonprofits regarding their internal structure and how they are governed. For example, a conventional nonprofit must have a board of directors, but a nonprofit LLC can be run by its members (similar to a for-profit LLC).

Taxes: While most nonprofits are exempt from federal income tax, they may still be subject to other taxes, such as sales and property taxes. And likewise, nonprofit LLCs are exempt from federal income taxes.

Fundraising: Nonprofit LLCs can engage in fundraising activities in the same way as traditional nonprofits. This means they can solicit donations from individuals, foundations, and corporations.

Disadvantages of a nonprofit LLC

There are also some disadvantages of a nonprofit LLC:

Complicated tax status: While a nonprofit LLC is exempt from federal income tax, it must still file an annual return with the IRS. In addition, nonprofit LLCs may be subject to state and local taxes. This can sometimes complicate the tax status of a nonprofit LLC more than that of a traditional nonprofit.

Public disclosure: Similar to Nonprofit Corporations, LLCs may also be subject to disclosing their financial information.

Finally, it’s important to note that not all states allow for forming nonprofit LLCs. So before you go ahead and form your LLC, be sure to check with your state’s laws to see if this option is available.

How to form a nonprofit LLC?

The process for forming a nonprofit LLC is similar to the method for forming a traditional LLC.

First, you’ll need to choose a name for your LLC and file Articles of Organization (or an equivalent document) with your state’s LLC filing office.

When choosing a name for your LLC, you’ll need to ensure that the title you select is available and not already used by another business.

Once you’ve filed your articles of organization, you’ll need to adopt governing documents for your LLC. These documents will include an Operating Agreement, which sets forth the rules and regulations governing the operation of your LLC.

You should tailor the operating agreement to fit your nonprofit organization’s specific needs. Once you’ve adopted governing documents for your LLC, you’ll need to apply for an EIN, and then apply for IRS approval of your tax-exempt status.

To do this, you’ll need to file for recognition of exemption with the IRS.

Once your application has been approved, you’ll be able to enjoy all the benefits that come with being a nonprofit LLC. Remember to comply with all applicable laws, and you’ll be well on your way to success.

The process for forming a nonprofit LLC can be complex, so it’s essential to seek the advice of an experienced business attorney before proceeding.

Operating an LLC as a nonprofit entity

If the IRS recognizes your LLC as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, you will need to comply with the requirements that apply to all section 501(c)(3) organizations.

In addition, you will need to abide by the laws of your state governing nonprofit organizations.

To find out more about operating an LLC as a nonprofit organization, you should consult with an attorney or accountant familiar with the laws governing nonprofit organizations in your state. You may also want to contact the IRS and your state tax agency to determine what reporting requirements apply to nonprofit organizations.

Forming a nonprofit LLC can be a great way to achieve your organization’s charitable purpose while enjoying certain benefits, such as tax-exempt status and eligibility for grants and other forms of funding. Just be sure to weigh the pros and cons carefully before you decide to form your LLC.

Conclusion

Nonprofit LLCs are a unique business structure that you can use to further various charitable or other philanthropic goals. If you’re thinking of forming a nonprofit LLC, it’s essential to understand the process and requirements involved.

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