Can an LLC Be a Nonprofit? Here’s What You Need to Know
Whether your LLC can be a nonprofit depends on some legal rules and your organization’s goals. This article explains what’s involved and whether a nonprofit LLC is the right move for you.
Lydia Wohlgemuth
Whether your LLC can be a nonprofit depends on some legal rules and your organization’s goals. This article explains what’s involved and whether a nonprofit LLC is the right move for you.
Thinking about starting a nonprofit or trying to figure out the best structure for your organization?
Picking the right setup for your nonprofit or small business can feel overwhelming, especially with all the rules and legal hoops to jump through.
In this article, we’ll explore whether a nonprofit can be a Limited Liability Company (LLC), what that could mean for you, and which states allow nonprofit LLCs.
We’ll also help you weigh the pros and cons of nonprofit LLCs so you can make the best decision for your organization.
LLCs and nonprofits are two types of organizational structures with different goals and ways of handling money. Let’s look at some key features and how they differ:
The main difference between LLCs and nonprofits comes down to where the money goes.
A regular LLC is typically a for-profit business, so the money it earns goes straight to the owner or shareholders.
A nonprofit, on the other hand, isn’t about making a profit. Any money it brings in has to go back into supporting its mission and benefiting the public.
LLCs have to pay taxes on their income like any regular business.
Nonprofits, however, are registered as a 501(c)(3) – or another relevant 501(c) category – and are tax-exempt. To keep that status, they have to be very transparent with their donations, sharing their finances publicly for anyone to see.
An LLC is owned by individuals or shareholders and can be bought or sold like any business.
However, a nonprofit is completely separate from the people who started it or work there. No one owns it. If a nonprofit ever shuts down, its assets must be given to another nonprofit, not sold off.
Finally, nonprofits exist to make a positive difference in the world, not to make money for themselves.
LLCs, on the other hand, seek to make money for their owners through the products or services they offer.
One thing to note: Most nonprofits are set up as nonprofit corporations, but there are some cases where an LLC can be a nonprofit, too. Keep reading to find out when that happens!
Yes, an LLC can be a nonprofit – but only if it’s wholly owned by one or more tax-exempt charitable organizations, and if its formation documents comply with IRS requirements.
The IRS provides specific eligibility rules for nonprofit LLCs in a document called “Limited Liability Companies as Exempt Organizations,” designed to ensure the LLC operates strictly for charitable purposes.
If you’re considering forming a nonprofit, understanding these rules can help you decide whether an LLC or a nonprofit corporation is the best fit for your organization.
One important requirement is that the LLC can’t be owned by an individual or a for-profit entity. Because of this, most single-member LLCs don’t qualify because their sole owner is usually an individual or for-profit company.
Here’s a quick overview of the other key requirements:
Because these IRS requirements are strict and complex, many nonprofits opt to incorporate as nonprofit corporations rather than forming an LLC.
Corporate status is often simpler and more straightforward when applying for tax-exempt status under 501(c)(3), with a clearer governance structure and fewer restrictions on ownership.
This makes it easier for nonprofits to comply with the law, raise money to support their mission, and operate smoothly.
When it comes to nonprofit LLC eligibility, rules vary widely by state. Some states allow nonprofit LLCs, but with specific rules, while others don’t allow them at all.
That being said, it’s important to check your state laws and liaise with a legal expert before moving forward with forming a nonprofit LLC.
Here’s an example of how some states handle nonprofit LLCs:
Like many business decisions, choosing between forming a nonprofit LLC or a nonprofit corporation comes with its own set of pros and cons.
Every situation is unique, but in general, most nonprofits opt to incorporate because it’s usually simpler and involves fewer hurdles to achieve their goals.
Before making a decision, it’s a good idea to consult with a lawyer or accountant to ensure you meet all state and IRS regulations.
So, can an LLC be a 501(c)(3)? Yes, it can, but that doesn’t always mean it’s the best choice for your organization. Knowing the IRS rules and your state’s regulations will help you figure out which structure fits your needs.
No matter which structure you choose, fundraising is key to any nonprofit’s success. Donorbox offers customizable donation forms, crowdfunding pages, recurring giving options, and donor management to take some of the workload off your plate, so you can focus on your mission.
Get started with Donorbox for free today, an easy win for you and your supporters!
No, a for-profit business or LLC can’t buy or own a nonprofit because nonprofits don’t have owners like for-profit companies do. Instead, they’re overseen by a board and exist to serve the public good. That said, an LLC can support a nonprofit by funding it, partnering with it, or creating a separate nonprofit division within the business.
Yes, a 501(c)(3) can be set up as an LLC, but it has to meet some pretty strict IRS rules, like having all members be nonprofits themselves. It’s less common, though, because the rules are more complicated than forming a traditional nonprofit corporation.
Yes, it’s possible for an LLC to be a nonprofit, but only if it follows specific IRS and state requirements focused on charitable purposes. Some states don’t allow nonprofit LLCs, so it’s important to check your state’s laws before moving forward.
With a background in professional writing, Lydia has over five years in nonprofit communications under her belt. Lydia’s passion for supporting nonprofits sparked during her college internships with global mission organizations, where she gained valuable insights into fundraising marketing strategies. These experiences have continued to fuel her dedication to empowering nonprofits through her writing.
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