Can an LLC Be Non-Profit?

By Joe Stone

LLCs are formed under state law, so if LLC owners -- called members -- want to operate the LLC as a non-profit venture, they first have to determine whether this is permissible under the state law where the LLC is formed. As of January 2011, non-profit LLCs are not permitted in all states, so it's a good idea to retain an attorney to advise you on the legality and consequences of forming such an entity in your state.

LLCs are formed under state law, so if LLC owners -- called members -- want to operate the LLC as a non-profit venture, they first have to determine whether this is permissible under the state law where the LLC is formed. As of January 2011, non-profit LLCs are not permitted in all states, so it's a good idea to retain an attorney to advise you on the legality and consequences of forming such an entity in your state.

LLCs

An LLC is a hybrid legal structure that combines the advantages of a corporation and partnership. Business owners are primarily motivated to form an LLC for the corporate-like feature of having their personal assets protected from the liabilities and obligations of the business. The features of an LLC taken from the partnership business structure are the flexibility in management and tax advantages.

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Non-profits

Whether or not an organization is non-profit depends on its compliance with IRS rules and regulations, as well as state tax laws. The basic rules for a non-profit do not concern the legal structure of the business, but the purpose for which the business is formed. The most familiar purpose for non-profits is a charitable purpose, usually referred to as a 501(c)(3) organization. However, as of January 2011, there are 26 types of non-profit that can be formed under IRS regulations.

State Information

The first step in determining whether an LLC in your state can used as a business structure for a non-profit organization is to review the requirements for forming an LLC promulgated by the state agency overseeing business organizations. For example, the California secretary of state provides forms and instructions for creating an LLC which provide tax information that specifies the steps to take if your business is formed to operate as a non-profit. Other states, such as Kentucky, require all non-profit organizations to file articles of incorporation and form as non-profit corporations.

Low-profit LLCs

Just as the LLC was designed to combine the benefits of a corporation and partnership, a new type of LLC is available in a few states that combines the benefits of a for-profit and non-profit venture. Started in Vermont in 2008, a low-profit LLC, or L3C, is designed to provide its members with a form of business structure that is less expensive and easier to manage than a corporation that can be used for an educational or charitable purpose, yet be able to make a small profit. As of September 2010, Illinois, Wyoming, Utah, Louisiana and Michigan also permit low-profit LLCs, and a few other states have pending legislation to allow this type of business structure.

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Comparison of Limited Liability Company Laws

References

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Can an LLC Have Separate Divisions?

Segregating assets within a company is one way of shielding a relatively stable and profitable asset from the liability that may result from a risky asset. Corporations can do this through the use of divisions that comply with complex IRS rules. In a few states, LLCs, or limited liability companies, are permitted to do the same through the use of what is known as a “series LLC.”

Michigan Limited Liability Company Act

The Michigan Limited Liability Company Act was enacted in 1993 to provide a new type of business structure that gives business owners protection from personal liability -- like a corporation -- with the management flexibility and tax advantages of a partnership or sole proprietorship. As originally enacted, the act recognized three types of limited liability companies: domestic, professional and foreign. In 2009, Michigan became one of the few states to amend its laws to recognize a fourth type – a low-profit limited liability company.

LLC Statutes in Illinois

In 1997, the Illinois Limited Liability Company Act was enacted and established the governing LLC statutes in Illinois, cited as 85 Illinois Compiled Statutes (ILCS) 180. The act authorized the formation of LLCs as new business structures that are designed to give business owners the advantages of a corporation -- limited liability -- and a partnership -- flexibility in management and pass-through taxation. In August 2005, the act was amended to authorize a new type of LLC called a "series LLC" and amended again in 2010 to provide for a new type of LLC called a "low-profit LLC.”

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