Can an LLC be a nonprofit? (2024)

Nonprofit organizations are usually formed as corporations, but can an LLC be a nonprofit? The answer is a resounding: maybe. A limited liability company or a Low-Profit LLC can exist as a nonprofit limited liability companyif the LLC is completely owned by a single tax-exempt organization and the LLC meets a dozen requirements as set forth in an IRS mandate called: “Limited Liability Companies as Exempt Organization Update.”

LLCs aren’t usually formed as nonprofit organizations because most people find the process complex and realize forming as a nonprofit corporation is more straightforward.

Because all of the members of the LLC nonprofit must also be tax-exempt organizations, this type of setup doesn’t make a lot of sense for individuals wanting 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.

IRS rules for formming an LLC nonprofit

When you are forming an LLC nonprofit, the IRS will make the final decision about yourtax-exemptstatus. Each member of the LLC must be a tax-exempt organization, and the following twelve rules also apply:

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:

1. Organizational documents must include an exact statement limiting LLC activities to one or more exempt objectives.

2. The language in your organizational documents must state clearly that the LLC be operated exclusively to further the charitable purposes of its members.

3. Organizational language must require LLC members to be section 501(c)(3) organizations, governmental units, or wholly-owned instrumentalities of a state or political subdivision of it.

4. Organizational language must prohibit any direct transfer of any LLC membership interest to a recipient other than a section 501(c)(3) organization or to a governmental unit.

5. Organizational language must state that the LLC interests or assetsmay 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.

6. 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.