Whether you've already formed a not-for-profit limited liability company, or LLC, or thinking about starting one, obtaining tax-exempt status for the entity allows you to take advantage of substantial tax benefits. If approved by the Internal Revenue Service, your not-for-profit LLC won't pay any income tax and can start accepting tax deductible donations. Becoming tax-exempt, however, means the LLC must satisfy all requirements under Section 501(c)(3) of the Internal Revenue Code.
Fit your business needs with the right LLC package
Create LLC First
Before you can submit an application for tax-exempt status, formation of the LLC needs to be completed first. Limited liability company formations are governed by state laws, but usually, the process is similar across jurisdictions. Once you decide on the state to create the LLC in, a certificate of organization -- or similar document -- must be prepared and filed with the appropriate agency, such as the jurisdiction's secretary of state office. Certificates of organization generally require a unique business name, the LLC's principal address and the name of a registered agent with an address in the state. If you plan on operating the LLC in the state in which it's created, you can serve as the registered agent instead of hiring one. And since the IRS requires the certificate to include a statement that limits the LLC's operations to a tax-exempt purpose, information about the LLC's not-for-profit activities should be entered on the document.
Organizational & Operational Requirements
The tax code only allows tax-exempt status for certain types of organizations that operate exclusively for at least one exempt purpose. Given that an LLC is a fairly new type of business entity, Section 501 doesn't expressly approve it as one of the eligible organizational structures. But for purposes of becoming tax-exempt, the IRS includes it in the definition of “corporation” -- which is one of the approved organizational structures. Satisfying the operational requirements means that the LLC must refrain from participating in political campaigns and lobbying activities, from operating a separate for-profit trade or business and most importantly, to always operate as a nonprofit -- meaning LLC members and other individuals may not receive any portion of the money raised.
501(c)(3) Exempt Purposes
Section 501 is very specific as to the types of activities that qualify as an exempt purpose. To have any chance of obtaining tax-exempt status, the LLC's operations are limited to charitable, educational, religious, scientific, literary and certain humanitarian purposes -- such as combating cruelty to children and animals. The only other exempt purposes cover the facilitation of amateur sports competitions and activities related to public safety.
Tax-Exempt Status Application
After forming the LLC and reviewing the requirements, the final step is to file an application for tax-exempt status with the IRS on Form 1023. The application is extensive and requires a substantial amount of information. But, if it's filed within 27 months -- starting with the month after the LLC was formed -- and approved, the tax-exempt status applies retroactively beginning on the day of formation. It may take some time to hear back from the IRS, but it eventually sends you a determination letter that notifies you whether or not the application was approved.