Can an LLC be a Tax-Exempt 501(c)(3) Charity?

Can an LLC be a Tax-Exempt 501(c)(3) Charity?

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.

2018-01-14T10:38:13+00:00August 4th, 2014|Charitable Organizations, FAQs, Start Up Issues|0 Comments

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