Is a Nonprofit LLC Possible?

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December 13, 2022
Author: NCH

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A limited liability company (LLC) pertains to a separate legal entity with combined features of a sole proprietorship, corporation, and partnership. LLC members enjoy liability protection, meaning that company creditors will lack the legal standing to come after the personal assets of the LLC members in the event of a lawsuit.

On the other hand, a nonprofit organization is exactly what it sounds like. It usually fulfills religious, charitable, educational, and scientific purposes instead of profit. In a nonprofit, the members do not receive income. The officers reinvest the assets into the organization. They may also give it to other charities or the public.The money that owners and employees receive is considered revenue and part of the nonprofit’s operation costs.

But is a nonprofit LLC possible? Yes, but the LLC must submit more documents than that required from a for-profit organization.

What are the IRS rules for forming a nonprofit LLC?

The Internal Revenue Service (IRS) imposes several requirements to be classified as an exempt organization type. In 2021, the IRS provided formal guidelines for LLCs seeking to qualify for tax exemption.

Here are some of the requirements contained in Notice 2021-56:

  • Under Section 501(c)(3), the Internal Revenue Code states that the LLC must be organized and operated exclusively for charitable or exempt purposes. Consequently, the members must not receive any share in the net earnings.
  • The articles of organization must limit the LLC’s purposes to one or more exempt purposes. The LLC may choose among the following:
Charitable Literary
Religious Testing for public safety
Educational Fostering national or international amateur sports competition
Scientific Preventing cruelty to children or animals
  • Upon the dissolution of the LLC, the members must distribute the assets to one or more exempt purposes listed in the table above.
  • All LLC members must fall under Section 501(c)(3) coverage, including organizations, governmental units, or wholly-owned instrumentalities of a state or political subdivision.
  • The members must not receive a share in the LLC’s assets.
  • The articles of organization must be consistent with applicable state laws.

What are the statutory rules for forming a nonprofit?

Each state has varying rules regarding the formation of nonprofit LLCs. For instance, Minnesota requires articles of organization, which include the name and purpose of the LLC, registered office address, and name of organizers. 

Minnesota collects a $155 filing fee for expedited service in person and a $135 fee if submitted by mail. On the other hand, Kentucky requires a $40 filing fee to form a nonprofit LLC. 

How to form a nonprofit LLC?

Forming a nonprofit LLC involves more steps than starting its for-profit counterpart.

  1. Name your nonprofit organization

Nevada Revised Statutes (NRS) 86.171 states the guidelines when naming an LLC. Here are some of the terms you must include in your LLC’s name: Limited-Liability Company, Limited Liability Company, and Limited. Some states also allow Ltd., L.L.C., L.C., and Co.

  1. Find a registered agent

A registered agent receives documents on behalf of the LLC. The said person also informs the members immediately of any deadline for filing legal and financial papers. The agent must maintain a physical address in the same state where the LLC operates.

  1. File the articles of organization

All states, including Nevada, will require you to file articles of organization. It may include the name of the LLC, nature of management, name of the agent, name and address of each member, and dissolution date.

  1. Create an operating agreement

An operating agreement outlines the rules, regulations, and provisions of your LLC. It protects the limited liability status of the business, puts into writing the verbal agreements between the members, and ensures that you have control over the operations of the LLC.

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  1. Obtain a certificate of existence

A certificate of good standing or certificate of existence proves that an LLC is legally authorized to conduct business in a particular state. It shows that a company successfully complied with the obligations required by the jurisdiction of the state of its operations.

  1. Apply for 501(c)(3) exempt status

Knowing how to form a nonprofit LLC involves getting through the IRS. This government agency requires LLCs to file Form 1024 electronically through Pay.gov. You must provide the following information:

  • Name of the organization
  • Mailing address
  • Employer Identification Number (EIN)
  • Names of members
  • Organizational structure
  • LLC’s activities
  • Compensation and financial arrangements
  • Financial data

Take note that you also need to upload the following:

  • Articles of organization
  • Operating agreement
  • Tax Information Authorization (if applicable)

The IRS demands several documents to verify if you comply with the guidelines prescribed in Notice 2021-56 and Section 501(c)(3) of the Code.

Pay.gov accepts the following payment methods:

  • Bank account (ACH)
  • Debit or credit card
  1. File annual reports

States may also require LLCs to file annual reports. For instance, if you have an LLC in Nevada, you must file an annual list and state business license application. The document contains the name of your LLC and the name and address of each member.

What are the benefits of a nonprofit LLC?

A nonprofit LLC contributes to society while enjoying the following legal advantages: .

  • Tax-exempt status

A nonprofit LLC can be exempt from both federal and state taxes. It means the IRS will not collect sales and employment taxes from the company. The LLC can also enjoy reduced postal rates.

  • Limited liability protection

Like a for-profit LLC, a nonprofit organization protects its members and officers against personal liability. Since the company is a separate entity, the members are not responsible for its debts and liabilities. For instance, the LLC’s creditors cannot come after the members’ personal properties.

  • Perpetual existence

A nonprofit LLC may have a statutory right to exist perpetually. It means that the company exists separately from the members, so it continues even after the exit of some individuals who own and manage the company.

Get help in forming your nonprofit LLC

Establishing an LLC requires several documents and procedures, which can become burdensome to new owners. NCH can assist you in forming your nonprofit LLC, including filing legal and financial records. NCH has been a business startup specialist for over three decades, with expertise in legal and tax services.

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