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By Acacia Wilson, Esq. | Legally reviewed by Tim Kelly, J.D. | Last reviewed September 20, 2021
This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw’s team of legal writers and attorneys and in accordance with our editorial standards.
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Yes, a limited liability company (LLC) can be a nonprofit. However, forming a nonprofit limited liability company can be complex, so few people choose this option.
When people refer to nonprofits, they often mean a nonprofit corporation. This is because many of the founders of nonprofits choose to incorporate. Due to the many requirements for forming a nonprofit limited liability company, it could be easier to organize your nonprofit as a corporation.
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What is the difference between a nonprofit corporation and a nonprofit LLC? At its core, a nonprofit is an organization that is formed to serve the public. The focus of the nonprofit may be educational, religious, charitable, or literary, for example. Even though there are many types of nonprofits, they have one thing in common: they are not formed to make profits.
A corporation and an LLC are types of business structures:
Forming a nonprofit corporation is similar to starting other types of corporations. You would need to:
Forming a nonprofit LLC is more complicated for a few reasons. First, there could be laws in your state against forming a nonprofit LLC. For example, some states have laws saying an LLC must be formed for a business purpose. This type of rule could be a problem where a nonprofit organization was formed for a charitable purpose. LLCs are regulated by state law, so you would need to find out if any state laws would prevent the formation of a nonprofit LLC in your state.
Another possible roadblock in forming a nonprofit limited liability company has to do with gaining 501(c)(3) status and meeting the IRS's conditions for nonprofit limited liability companies.
Suppose you are interested in forming a nonprofit LLC. In that case, you'll probably want to know if your LLC could get 501(c)(3) status. 501(c)(3) status is a tax status that allows nonprofit organizations to operate without a federal income tax. Nonprofit corporations can qualify for tax-exempt status.
A nonprofit LLC can also qualify for tax-exempt status in three situations:
When a single member owns the LLC, the IRS will treat the LLC as a sole proprietorship for tax purposes. When two or more members, which are 501(c)(3) organizations, own the LLC, the IRS will treat the business entity as a partnership for tax purposes. This means that there will be pass-through taxation which will flow to the LLC owners. If the LLC uses Form 1023 to get recognized as a tax-exempt entity, the IRS will treat the entity as a corporation for tax purposes. The Form 1023 route also requires that the owners of the LLC be 501(c)(3) organizations.
When the IRS considered whether or not an LLC could get 501(c)(3) status, they decided that an LLC could qualify for the tax exemption. However, the IRS also laid out twelve conditions for an LLC to be recognized under the 501(c)(3) exemption. A document called "Limited Liability Companies as Exempt Organizations-Update" contains a list of the conditions.
The focus of the conditions is on making sure that the nonprofit LLC meets the requirements for a 501(c)(3) organization under the Internal Revenue Code. To meet these requirements, the LLC must be organized for exempt purposes. Also, the LLC can't carry on activities that are not permitted for 501(c)(3) organizations.
Many of the conditions have to do with the language in the organizational documents for the LLC. Typically, to form an LLC, you must make and file Articles of Organization.
Articles of Organization often include the business name, a statement of purpose, registered agent information, and management information. An LLC usually has an operating agreement, as well. In many states, any organizational language is acceptable as long as it is consistent with the laws of that state.
If you are interested in forming an LLC that meets the conditions for 501(c)(3) status, you may need to include organizational language such as the following:
If your LLC otherwise meets the requirements for a tax-exempt organization and meets the twelve conditions, then your business entity could be recognized as a nonprofit LLC.
If you're not sure about forming a nonprofit corporation or a nonprofit LLC, another option is a low-profit LLC. A low-profit LLC is a for-profit business entity with a charitable purpose. Some states have not yet recognized the low-profit LLC (or L3C), so you will first need to determine if you can form this business entity in your state.
Some business owners find the L3C appealing because it allows them to further a charitable purpose without worrying about nonprofits' restrictions. A low-profit LLC is not a tax-exempt entity.
Low-profit LLCs can make profits from capital investment. Private foundations have to contribute a percentage of their earnings to a charity each year. This is called a program-related investment.
Often, there is a process that the foundations must go through to make sure that the investment they plan to make, to satisfy the yearly requirement, qualifies as a program-related investment (PRI). However, a foundation can invest in an L3C without going through this long process. This is because the requirements to form an L3C match the requirements of a PRI.
With FindLaw's DIY business formation service, we make forming an LLC or nonprofit corporation simple.
You might also find it beneficial to weigh all of your options with an experienced lawyer in your area. Don't hesitate to consult a business and commercial lawyer about your small business and the type of business entity that is right for you.
Contact a qualified business attorney to help you navigate the process of starting a business.
We have a DIY option you can use to save time and stress.We help you:
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