What does nonprofit mean? Nonprofits are generally established as corporations. This is the model that the IRS wants to see when applying for tax exemption, which is a critical feature for nonprofits. But can a nonprofit organization be an LLC?
Short answer: Yes, but in most cases, it’s not the best choice.
There are cases where it makes sense for an LLC to be formed as a subsidiary of an established nonprofit corporation or multiple organizations, but these are the exception rather than the rule.
A limited liability company (LLC) is a business that is registered, governed, and recognized at the state level. It’s generally used by partnerships and small groups and is characterized by:
Every state has its own regulations surrounding LLCs. Most do not have a nonprofit LLC designation available, however:
Just as with a nonprofit corporation, there are state-specific requirements and processes related to obtaining a nonprofit EIN number and a tax exempt status for state and local income tax, property tax, and sales tax.
At the federal level, it’s not strictly the type of entity that is recognized, but the method of taxation. Traditional LLCs, as a pass-through, disregarded entity.
Wondering what is the difference between nonprofit and not for profit? Well, a nonprofit organization is being operated as a normal business with a goal to earn a profit without supporting any of the members. Meanwhile, a not for profit organization does not have a goal of earning revenue.
The IRS does recognize nonprofit LLCs, but there are some very strict guidelines. Obtaining tax exempt status federally as a nonprofit LLC formed solely by nonprofit corporations is the only situation in which a nonprofit LLC is federally registered.
As opposed to having members who are individual people, a nonprofit LLC seeking federal tax exempt status can only have one or more tax exempt nonprofit organizations as members.
In addition to this membership limit, nonprofit LLCs must document and meet 12 fairly burdensome requirements to be granted federal tax exempt status, including:
A nonprofit organization might set up an LLC in order to add a layer of separation for legal or liability protection. It makes sense for a nonprofit to establish an LLC for:
An LLC can also be a layer to further protect a nonprofit’s carefully regulated tax exempt status during a joint venture with other organizations. Multiple organizations can establish an LLC in order to:
A nonprofit entity can be a member of a traditional LLC, but the LLC can only be categorized as a nonprofit LLC if all other members are also tax exempt nonprofits.
So, can an LLC be a nonprofit? The more flexible structure and simpler reporting requirements of an LLC may make it seem like a great choice for a nonprofit startup.
But the reality is that, because it’s a nonstandard approach and a pass-through entity designation, there are a lot of limitations and hoops to jump through to gain tax-exempt status at both the federal and state levels.