Can an LLC Be a Nonprofit?

Nonprofits are often referred to as corporations, but can they also be LLCs? They can, but it isn’t typical. Find out more about how LLCs can act as a nonprofit.

Ready to start your business? Plans start at $0 + filing fees.

Trustpilot star rating bar
can an llc be a nonprofit

Contents

Updated on: July 31, 2024
Read time: 3 min

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 company if 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.”

volunteers at nonprofit LLC sitting on concrete

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 your tax-exempt status. 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 assets may 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.

7. Organizational language must require any amendments to LLC articles of organization to be consistent with section 501(c)(3).

8. Organizational language must prohibit the LLC from merging with, becoming, or converting into, a for-profit business entity.

9. Organizational language must require that the LLC not distribute any assets to members who cease to be organizations - described in section 501(c)(3), governmental units, or instrumentalities.

10. Organizational language must contain an acceptable contingency plan in the event one (or more) members ceases to be a 501(c)(3), governmental unit, or instrumentality.

11. Organizational language must state that the LLC exempt members will  enforce all of their LLC rights to pursue all legal and equitable remedies to protect LLC interests.

12. Organizing document provisions must be consistent with state LLC laws, and enforceable at law and in equity.

If you can meet all of these requirements when starting a nonprofit, the IRS may allow you to form a nonprofit LLC.

If you are considering forming a nonprofit LLC, you may want to talk to an attorney first. Get legal advice from a business attorney regarding nonprofit LLC formation by signing up for the LegalZoom business legal plan.

 

Ready to start your business? Plans start at $0 + filing fees.Start My LLC
Twitter logoFacebook logoLinkedIn logoReddit logo

This article is for informational purposes. This content is not legal advice, it is the expression of the author and has not been evaluated by LegalZoom for accuracy or changes in the law.

2 days ago
Trustpilot star rating bar

Piece of Cake!

Wow, if I had known HOW EASY it would be to create my own LLC I would have done it months ago! I literally created my own business in MINUTES. LegalZoom takes all of the fear, confusion, guesswork and administrative burden out of starting your own business. Strongly recommend it!

Lori Ann Farrell
6 days ago
Trustpilot star rating bar

Excellent, rapid, economical LLC formation…

Legal Zoom enabled me to very quickly and economically set up my LLC

Sarah Collins
7 days ago
Trustpilot star rating bar

They made creating my llc such an easy…

They made creating my llc such an easy process and gave me plenty of options. I genuinely never even thought of. So happy I had this option.

Cassaundra Eckleberry
10 days ago
Trustpilot star rating bar

Filed my LLC confidently thanks to LegalZoom

Sittie answered all my questions and made me feel much more confident about forming my LLC this morning. Including some basic tax questions that she was able to answer. So greatly appreciate her help.

Cassandra E
21 days ago
Trustpilot star rating bar

LegalZoom was great to start my first LLC

LegalZoom was great to start my LLC! The process was simple and easy! Very fast as long as you know what you want your name to be and what your business is doing. Highly recommend for the people that like to do it themselves online. Great experience

Bruce. M
25 days ago
Trustpilot star rating bar

Out-of-State LLC Business Formation

I was at a standstill with no resolution in sight - LegalZoom fixed me up within minutes & made filling the Out-of-State business form LLC-5 with the State of California, easy! Thank you!

Cheryl Williams
54 days ago
Trustpilot star rating bar

Legalzoom help me set up my LLC efficiently. The instructions were simple, and I had a positive experience overall.

Legalzoom made starting my LLC fast, easy, and stress-free.

CoreSpan Technologies
32 days ago
Trustpilot star rating bar

legal Zoom Concierge

legal Zoom Concierge agent, Jelly, called me and walked me through the process of selecting how I wanted to set up my LLC with through explanations. I recommend using the Legal Zoom concierge for customers not yet familiar with the process of creating and LLC.

CC
101 days ago
Trustpilot star rating bar

Was very easy to use and I got my LLC…

Was very easy to use and I got my LLC the same day. I was SHOCKED. I know every state is different but it was like a miracle. Thank you LZoom!

Erica Walters
102 days ago
Trustpilot star rating bar

My experience has been excellent from…

My experience has been excellent from the first day opening my LLC, and continues to be great now that my business is thriving. All of my important documents are organized and secured on their sight. Which is amazing when getting loans and doing my taxes. They also provide great customer service every time I call with questions. Would highly recommend using LegalZoom. Plan to start another business and will be using them again. Thank you LegalZoom!

George Wells
108 days ago
Trustpilot star rating bar

Five Stars For LegalZoom

LegalZoom offers a streamlined and accessible platform for creating an LLC, simplifying complex legal procedures for entrepreneurs. Their user-friendly interface and comprehensive guidance ensure that even individuals without legal expertise can confidently establish their businesses. Overall, LegalZoom enhances efficiency and provides valuable support in the LLC formation process.

CLC
Rated4.6out of 5 based on24,902+ reviewson

Showing our favorite reviews