How to Convert from an LLC to a Nonprofit Corporation

By Lee Hall, J.D.

How to Convert from an LLC to a Nonprofit Corporation

By Lee Hall, J.D.

Converting your limited liability company, or LLC, to a nonprofit corporation to obtain 501(c) status may seem advantageous. As a for-profit entity, an LLC must pay federal government income taxes while a nonprofit corporation with tax-exempt status under Section 501(c) of the Internal Revenue Code does not. Furthermore, under this tax arrangement, a nonprofit corporation may accept funding from tax-deductible donations and grants.

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If you choose to convert your LLC to a nonprofit corporation, your new operating agreement must contain language that confines the new corporation's business activity to a scientific, educational, charitable, or religious purpose.

If your goal is generating a profit, then turning your company into a nonprofit is legally inappropriate. Carefully consider your mission and goals before converting your business.

Statutory Conversion

A statutory conversion, where permitted by state law, is the simplest and least expensive method to turn an LLC into a corporation. It spares you the step of forming a new corporation before transferring all of the assets and debts.

The process of conversion involves two basic steps.

1. Your LLC members adopt an amendment to the Articles of Incorporation to effect the conversion.

This must win the approval of all of your shareholders. In effect, the company's transformation takes property from these stockholders as you eliminate the outstanding shares. While laws vary by state, in most states, a unanimous vote of LLC members is required to convert to a corporation if your LLC does not have an operating agreement.

2. Your LLC obtains the appropriate state form to execute the Articles of Entity Conversion (also called "Articles of Conversion").

Forms for converting an LLC into a corporation are typically found on the website of the state agency that is responsible for regulating businesses. If you will be acting as the nonprofit corporation's authorized representative, be prepared to provide the name of the nonprofit corporation, designate yourself and anyone else who will serve as a registered agent, and indicate how many classes and shares of stock will be issued. You may be asked to assign an effective date of conversion if you choose a date other than the one the state assigns as well as pay a small filing fee.

If your state allows the filing of Articles of Entity Conversion, your LLC will automatically become a corporation, and any assets and debts that your LLC holds will automatically transfer to your new nonprofit corporation. Additionally, your LLC's established EIN can work for the new nonprofit corporation.

Note that a minority of states do not permit conversions of LLCs to corporations in their statutes. They may allow only statutory mergers, which require you to form a new corporation and then merge the entities.

Weighing Other Options

If converting from an LLC to a nonprofit corporation does not seem right for you, there are alternatives that may better suit your business goals.

Some states, for example, allow the L3C, a low-profit form of LLC. This business entity, however, is not eligible for 501(c)(3) status and presents no significant advantage over an existing LLC. You might instead consider becoming a certified B corp as a way to meet your social contributions while earning income. Alternatively, you may meet your business goals best by undertaking an alliance with an existing nonprofit and carrying out the work through the established group.

Converting an LLC to a nonprofit corporation can be done, but is limited to specific business activity related to scientific, educational, charitable, or religious purposes. Contacting an experienced attorney in your state may help you through each step and advise you on your appropriate and legal options.

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.

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