Using an LLC as a Nonprofit

Hi Lee Phillips here again. I want to talk about using an LLC as a nonprofit organization. People get the idea that they're gonna have a non-profit. Well, you're probably not going to use an LLC as a nonprofit organization. The primary reason is the LLC that's the nonprofit has to be solely owned by another entity which in and of itself is a nonprofit and you're not a non-profit. Now you can set up a nonprofit corporation and have it be owned by individuals who are not nonprofit in and of themse

lves but the LLC is different it has to be owned only by a member the owner that is in and of itself a non-profit and it has to meet the "Limited Liability Companies as Exempt Organizations - Update" from the IRS and there are a dozen things that you have to follow in order to have your LLC qualify as a non-profit. The organizational papers the papers that the papers that you file to set up the LLC as a non-profit have to specifically state that the only activities that the LLC can do are in fac

t related to the nonprofit function of the LLC and that's going to be education it's going to be servicing somebody there are a number of criteria that the IRS has things that they consider to be nonprofit type activities. The LLC has to be operated exclusively to further the charitable purposes of that thing and this all has to be written down in the organizational papers themselves. The organizational language has to require that the LLC members be a non-profit a 501(c)(3) or some such organiz

ation a government organization which is nonprofit and you're not a government organization that's nonprofit. It's got to prohibit any direct transfer of the assets of the LLC to something or somebody other than a non-profit. It's got to guarantee that upon dissolution of the LLC all of the assets of the LLC go to nonprofits. It's got to require that any amendments to the LLC are consistent with the 501(c)(3) requirements. It's got to prohibit the LLC from merging with anything or anybody that's

not in and of itself a non-profit. So all of these things the language has got to contain an acceptable contingency plan acceptable to the IRS, a contingency plan that in the event one of the owners suddenly becomes a non a non non-profit does not qualify as a non-profit then what happens? The provisions must be consistent with all of the state laws governing nonprofits. The bottom line is the LLC is not the entity the legal structure that you want for a nonprofit organization. That's going to

be your corporation and corporations do have advantages over LLC's and this is one of those advantages that a corporation has over an LLC. The LLC is just too restrictive for most people most organizations to consider as the legal structure for a spin-off nonprofit or the original formation of a non-profit of any type. This is Lee Phillips talking about using LLC's for nonprofit organizations