Check out our new page called “Answers to Frequently Asked Questions about 501(c)(3) Tax Exempt Charities.” Here’s a list of the topics covered in the FAQ:
Question: My group is considering forming a tax-exempt charitable organization. Can the organization be a limited liability company or must it be a nonprofit corporation?
Answer: It can be an LLC if the LLC is owned only by Section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof and the LLC satisfies the 12 conditions described in an IRS paper called “Limited Liability Companies as Exempt Organization Update.” The LLC cannot have individuals or nonexempt organizations as members, and its organizing documents must contain certain language required by the IRS. The 12 conditions are:
1. The organizational documents must include a specific statement limiting the LLC’s activities to one or more exempt purposes.
2. The organizational language must specify that the LLC is operated exclusively to further the charitable purposes of its members.
3. The organizational language must require that the LLC’s members be section 501(c)(3) organizations or governmental units or wholly owned instrumentalities of a state or political subdivision thereof (“governmental units or instrumentalities”).
4. The organizational language must prohibit any direct or indirect transfer of any membership interest in the LLC to a transferee other than a section 501(c)(3) organization or governmental unit or instrumentality.
5. The organizational language must state that the LLC, interests in the LLC (other than a membership interest), or its assets may only be availed of or transferred to (whether directly or indirectly) any nonmember other than a section 501(c)(3) organization or governmental unit or instrumentality in exchange for fair market value.
6. The organizational language must guarantee that upon dissolution of the LLC, the assets devoted to the LLC’s charitable purposes will continue to be devoted to charitable purposes.
7. The organizational language must require that any amendments to the LLC’s articles of organization and operating agreement be consistent with section 501(c)(3).
8. The organizational language must prohibit the LLC from merging with, or converting into, a for -profit entity.
9. The organizational language must require that the LLC not distribute any assets to members who cease to be organizations described in section 501(c)(3) or governmental units or instrumentalities.
10. The organizational language must contain an acceptable contingency plan in the event one or more members ceases at any time to be an organization described in section 501(c)(3) or a governmental unit or instrumentality.
11. The organizational language must state that the LLC’s exempt members will expeditiously and vigorously enforce all of their rights in the LLC and will pursue all legal and equitable remedies to protect their interests in the LLC.
12. The LLC must represent that all its organizing document provisions are consistent with state LLC laws, and are enforceable at law and in equity.
Question: Must an organization whose corporate charter is reinstated after being administratively revoked or suspended by the state submit a new exemption application?
Answer: No. If a corporation is reinstated by the state after an administrative suspension or dissolution of its corporate charter, its exempt status may be reinstated without the need for the corporation to reapply. The organization must submit evidence from the state that its charter has been reinstated, indicating the effective date of reinstatement. In addition, the organization should provide evidence that it has complied with any filing requirement for annual returns during the period during which its corporate status was administratively suspended or dissolved.
If, however, an organization’s exempt status has been automatically revoked for failing to file annual returns, exempt status cannot be reinstated unless it submits a new exemption application, even if the state reinstates its corporate status.
Question: How does an organization become tax-exempt?
Answer: To be recognized as exempt from federal income taxation, most organizations are required to apply for recognition of exemption. For section 501(c)(3) organizations, the law provides only limited exceptions to this requirement. Applying for recognition of exemption results in formal IRS recognition of an organization’s status, and may be preferable for that reason.
Question: Do I need a tax-exempt number for my organization?
Answer: No. Unlike some states that issue numbers to organizations to indicate that these organizations are exempt from state sales taxes, the IRS does not issue numbers specifically for exempt organizations. While the Internal Revenue Service does issue Employer Identification Numbers (EINs), these are merely a unique identifier, similar to a Social Security number for an individual. Applying for and receiving an EIN says nothing about the organization’s tax status; however, your organization needs an EIN to apply for tax exemption.
Question: How do I get an Employer Identification Number (EIN) for my organization?
Answer: You can apply for an EIN on-line, over the telephone, via fax or through the mail. See the instructions for Form SS-4 , Application for Employer I.D. Number, for further details.
Third parties can receive an EIN on a client’s behalf by completing the new “Third Party Designee” section and obtaining the client’s signature on Form SS-4. This avoids having to file a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) to get an EIN for their client.
Note: Don’t apply for an EIN until your organization is legally formed. Nearly all organizations are subject to automatic revocation of their tax-exempt status if they fail to file a required return or notice for three consecutive years. When you apply for an EIN, the IRS presumes the organization has been legally formed and the clock starts running on this three-year period.
Question: What is the difference between nonprofit and tax-exempt status?
Answer: Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code. See Types of Tax-Exempt Organizations or Publication 557 for more information.
Question: How can my application for tax-exempt status be expedited?
Answer: In general, applications are processed in the order received by the IRS. Sometimes, however, the IRS will work a case outside the regular order. For expedited processing to be granted, however, there must be a compelling reason to process the case ahead of others. Compelling reasons include the following:
For a pending grant, the following specific information would help support a request for expedited processing:
A request for expedited processing must be made in writing and must fully explain the compelling reason. Granting expedited processing is at the discretion of the IRS.
Note: An optional expedited process is available for certain 501(c)(4) applicants.
Additional information – Examples
Question: How do I obtain an application for tax-exempt status?
Answer: Most organizations applying for exemption must use specific application forms. Two forms currently prescribed by the Service are Application for Recognition of Exemption Form 1023 (and instructions) (for charitable organizations); and Package 1024, Application for Recognition of Exemption (for other tax-exempt organizations). The application your organization is required to submit is specified in Publication 557 . You may request forms by calling 1-800-TAX-FORM (1-800-829-3676).