Can an LLC Be Non-Profit?

By Joe Stone

LLCs are formed under state law, so if LLC owners -- called members -- want to operate the LLC as a non-profit venture, they first have to determine whether this is permissible under the state law where the LLC is formed. As of January 2011, non-profit LLCs are not permitted in all states, so it's a good idea to retain an attorney to advise you on the legality and consequences of forming such an entity in your state.


An LLC is a hybrid legal structure that combines the advantages of a corporation and partnership. Business owners are primarily motivated to form an LLC for the corporate-like feature of having their personal assets protected from the liabilities and obligations of the business. The features of an LLC taken from the partnership business structure are the flexibility in management and tax advantages.


Whether or not an organization is non-profit depends on its compliance with IRS rules and regulations, as well as state tax laws. The basic rules for a non-profit do not concern the legal structure of the business, but the purpose for which the business is formed. The most familiar purpose for non-profits is a charitable purpose, usually referred to as a 501(c)(3) organization. However, as of January 2011, there are 26 types of non-profit that can be formed under IRS regulations.

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State Information

The first step in determining whether an LLC in your state can used as a business structure for a non-profit organization is to review the requirements for forming an LLC promulgated by the state agency overseeing business organizations. For example, the California secretary of state provides forms and instructions for creating an LLC which provide tax information that specifies the steps to take if your business is formed to operate as a non-profit. Other states, such as Kentucky, require all non-profit organizations to file articles of incorporation and form as non-profit corporations.

Low-profit LLCs

Just as the LLC was designed to combine the benefits of a corporation and partnership, a new type of LLC is available in a few states that combines the benefits of a for-profit and non-profit venture. Started in Vermont in 2008, a low-profit LLC, or L3C, is designed to provide its members with a form of business structure that is less expensive and easier to manage than a corporation that can be used for an educational or charitable purpose, yet be able to make a small profit. As of September 2010, Illinois, Wyoming, Utah, Louisiana and Michigan also permit low-profit LLCs, and a few other states have pending legislation to allow this type of business structure.

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Differences Between a 501(c) and an L3C

The low-profit limited liability company, known as L3C, is a new organizational form that is now available for charitable organizations. The traditional method for organizing a charitable group is to file for 501(c) status with the Internal Revenue Service. Despite these organizational structures' shared focus on charitable purposes, they have some key differences regarding federal taxation, fundraising and distribution of organizational assets. Also, the group's location may influence the organizational options that are available. When considering which organizational type to pursue, consider consulting with an attorney.

How to Form a Mutual Benefit Corporation in California

California law provides for several types of nonprofit corporations, one of which is called a mutual benefit corporation. The primary aspect of a mutual benefit corporation is that it is formed and operated solely for the benefit of its members, rather than making a profit. A mutual benefit corporation can be formed for any nonprofit purpose except a charity. To form a mutual benefit corporation in California, you file articles of incorporation with the Secretary of State’s office. You can download a sample form of articles from the secretary's website.

501(c)(3) Auxiliary Restrictions

A 501(c)(3) auxiliary organization is an independent legal entity organized to support a parent organization that is organized as a 501(c)(3), such as a church, university, hospital or other charity. With some exceptions, a 501(c)(3) auxiliary must follow the same restrictions as its parent organization. These restrictions include rules about the organization's purpose, activities and profit distributions.

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