How Do I Convert From a Nonprofit to an LLC?

By Tom Speranza, J.D.

How Do I Convert From a Nonprofit to an LLC?

By Tom Speranza, J.D.

Nonprofit entities form to serve a public interest rather than to operate as a business or generate profits for individuals. If a nonprofit generates income, it must use the money to fund its operations and further its mission. Nonprofits never distribute income to private shareholders.

Laptop with "non profit" and graphs on screen

Advantages of organizing a nonprofit as an LLC.

Most nonprofits organize as corporations, but an increasing number of states allow nonprofits to form as limited liability companies (LLCs). An LLC provides the same protection from personal liability as a corporation but has some advantages over the corporate form, including:

  • Fewer governance requirements: Unlike corporations, which must be managed by directors and officers, LLCs can be managed directly by their owners (known as members) or by managers.
  • More flexible structure: State LLC laws grant more discretion to LLCs than corporations regarding management and capital structure—an LLC can more easily customize its operating agreement to fit a particular situation.

Methods of converting a corporation to an LLC.

There are three methods for converting a nonprofit corporation to an LLC, each of which has advantages and disadvantages, depending on the situation:

Statutory Conversion

The easiest way to convert a corporation to an LLC is the entity conversion process available in most states. You'll file a Certificate of Conversion with the Secretary of State's office. The certificate will describe the old entity (the nonprofit corporation) and the desired new entity (a nonprofit LLC—if available in the state—or a regular LLC organized for nonprofit purposes). You'll also need to include the articles of organization.

If your nonprofit corporation and the new LLC are formed in the same state, you are not required to dissolve the corporation. However, if you convert a nonprofit corporation formed in one state into an LLC formed in a second state, you will need to dissolve the corporation and comply with any other regulatory requirements in the corporation's home state for terminating a nonprofit.

A major advantage of this process is that all assets and liabilities of the nonprofit automatically transfer to the new entity without the need to create or sign transfer documentation, such as deeds, assignments, and bills of sale.

Statutory Merger

If a state's laws do not provide for an entity conversion process, you can transform a nonprofit corporation into an LLC using a merger. In a merger, you create the entity that will survive the merger (the new LLC) by filing articles of organization and then a certificate of merger stating that the corporation will merge into the LLC, with the LLC emerging as the surviving entity. If the corporation and LLC formed in different states, you must also file a certificate of merger in the corporation's home state to notify it of the transaction.

As with a statutory conversion, a merger automatically transfers all assets and liabilities to the surviving entity without the need for transfer documents, but you will need to review the nonprofit corporation's contracts (for example, its office lease, software licenses, and loan documents) to determine whether the other party must provide its consent to the merger and obtain such consents to the extent necessary.

Assignment and Dissolution

The most complicated way to convert a nonprofit corporation into an LLC is to create the new entity (the LLC) and then transfer the assets and liabilities of the nonprofit corporation to the LLC using the various transfer documents required under state law (deeds, assignments, bills of sale, assumption agreements). This method only makes sense if the LLC wants to pick and choose which assets and liabilities of the nonprofit corporation it is inheriting, but keep in mind that the various transfers will likely have tax implications and trigger the need for consents under transferred contracts.

If the nonprofit will terminate following the various transfers, you must file dissolution documents with the state and comply with any liquidation requirements in the nonprofit's charter and under state and federal law.

Be sure to check state and federal law.

The laws around converting entities, particularly as they relate to nonprofits, is complicated. As mentioned above, not every state allows nonprofits to exist in LLC form, and others require specific language in the articles of organization. Federal tax law adds another layer of legal requirements and imposes certain limits on the structure of nonprofit LLCs.

Finally, any time one entity transfers assets or employees to another, there are potential state, federal, and local tax implications. You should understand all of the legal compliance issues that will arise from the conversion of your nonprofit before embarking on such an important transaction.

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.