Can an LLC Be Nonprofit?

By Brette Sember, J.D.

Can an LLC Be Nonprofit?

By Brette Sember, J.D.

A nonprofit can be a great way to organize a business that seeks to promote a cause or make a difference. When you start your nonprofit, you might be interested in forming it as an LLC. Not every state allows this, so you'll want to check into that first. If your state does, you'll follow that state's requirements for forming an LLC and for filing as a nonprofit. You'll also need to file with the IRS. If your state doesn't allow nonprofit LLCs, there's a close alternative you might consider.

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What Is an LLC?

An LLC, or limited liability company, is a business structure that provides the members (who are also its owners) with protection from personal liability, while also allowing them the flexibility of a partnership or sole proprietorship structure. An LLC is a less complex business structure than a corporation. LLCs are formed under state law, and each state has its own requirements and procedures, which may differ.

What Is a Nonprofit?

To qualify as a nonprofit organization, a company must meet the IRS rules for nonprofits, as well as laws within its own state. Nonprofit status is based on the purpose for which the business is formed. The IRS lists many types of nonprofit organizations, but the most common is a 501(c)(3) nonprofit, which is formed for one of these purposes:

  • Religious
  • Educational
  • Charitable
  • Scientific
  • Literary
  • Testing for public safety
  • To foster national or international amateur sports competition
  • The prevention of cruelty to children or animals

In a nonprofit company, any profit made is put back into the organization, rather than being paid out to members or stockholders, as in other types of organizations.

Forming a Nonprofit LLC

If you're interested in forming a nonprofit LLC, you'll need to determine first whether your state permits LLCs to be nonprofits. The following states do:

  • California
  • Delaware
  • Ohio
  • Michigan
  • Minnesota
  • Tennessee
  • Texas
  • Virginia

If your state allows nonprofit LLCs, you'll need to check into the requirements. There will be the state LLC forms, for a start, and there may be additional forms for filing as a nonprofit. You will also need to file with the IRS for tax-exempt status.

If your state does not permit an LLC to be a nonprofit, you can still form a nonprofit corporation.

Low-Profit LLCs Option

An alternative to a nonprofit LLC is a low-profit LLC. Also called an L3C, this business structure has a charitable, educational, or socially beneficial purpose. It must not have a political purpose as its primary goal. Although an L3C can earn a profit, that is not its main purpose. If it does earn a profit, it can keep the profits and reinvest them in the business or distribute that profit among its members, just as a traditional LLC would. An L3C can also accept investment capital.

L3Cs are permitted in these states:

  • Illinois
  • Kansas
  • Louisiana
  • Maine
  • Michigan
  • Rhode Island
  • Utah
  • Vermont
  • Wyoming

L3Cs can also be formed in the federal jurisdictions of the Crow Indian Nation of Montana and the Oglala Sioux Tribe. North Carolina allows existing L3Cs to function, but no new L3Cs can be formed at this time in that state. The filing process for an L3C is similar to that of an LLC and the L3C offers flexibility similar to that of an LLC. The L3C's profits are taxed by the IRS (the profits are passed through the members and taxed at their individual rates, just as with a traditional LLC) and those profits may be taxed under state law as well.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.