A nonprofit corporation is a corporate business structure that has obtained tax-exempt status under Section 501(c) of the Internal Revenue Code. Businesses that qualify under Section 501(c) do not have to pay tax on business income, and are eligible to receive grant money from the government and charitable organizations. Depending on the purpose of your company, it may be advantageous to convert your LLC to a corporation and obtain 501(c) status. This conversion requires filing with both the IRS and the state agency responsible for regulating business organizations.
Vote to convert from an LLC to a corporation. While state laws vary, most states require a unanimous vote of LLC members to convert to a corporation if your LLC does not have an operating agreement.
File an Articles of Incorporation with the state agency responsible for regulating business organizations. The method of registering an LLC varies greatly by state; some may require you to execute a new Articles of Incorporation for your new corporation, while others permit you to execute an Articles of Conversion. The forms for converting an LLC to a corporation can generally be found on the website of the state agency responsible for regulating business organizations. Provide a name for your corporation, designate a registered agent for service of process, and indicate how many classes and shares of stock will be issued in the corporation. Also provide your name and street address. The filing fee may range anywhere from $75 to $300.
Transfer the assets and debts of your LLC to your nonprofit corporation. If your state permits the filing of an Articles of Conversion, your LLC will automatically become a corporation, and the assets and debts of your LLC will automatically transfer to your new corporation. If you file an Articles of Incorporation, you will need to manually transfer the assets and debts of your LLC to your new corporation. The simplest way to transfer assets is to draft a business asset transfer agreement. Set forth all of the assets and debts of your LLC. Have all of the members of the LLC and the board of directors of your new corporation sign the agreement.
Execute an operating agreement with specific nonprofit provisions. Section 501(c) requires all nonprofit corporations to include in their operating agreement language that restricts the corporation from engaging in business activity that is not for a scientific, educational, charitable or religious purpose. Additionally, your operating agreement must include language that, when your corporation dissolves, any remaining assets must be used for a permissible scientific, charitable, educational or religious purpose.
File Form 1023 with the IRS. Form 1023 is the IRS’s application for 501(c) status (see Resources). This is a very detailed and complex form. At a minimum, you will need to provide extensive documentation as to the persons involved with the management of the corporation, the way in which the corporation will be operated and the projected income and expenses for your corporation. You may require the help of a tax attorney in preparing Form 1023. The filing fee is $400 if the gross receipts of your corporation are less than $10,000 annually, and $800 if the gross receipts of your corporation exceed $10,000. Mail the form to the Internal Revenue Service, P.O. Box 12192, Covington, KY 41012-0192.