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.
Fit your business needs with the right LLC package
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.
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.
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.
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.
References & Resources
- Business.gov: Limited Liability Company (LLC)
- Business.gov: Non Profit
- IRS.gov: Tax Information for Charities & Other Non-Profits
- California Secretary of State: Limited Liability Companies Tax Information
- Kentucky Secretary of State: Information on Forming Non-Profit Organizations
- Stoel Rives LLP: Newest Limited Liability Company Structure