A limited liability company is an organizational structure that has the liability advantages of a corporation and the flexibility of a partnership. The founders of many nonprofit agencies choose to organize their groups as LLCs to benefit from these advantages. After the group has received approval from its home state to form a nonprofit LLC, the leaders can apply for tax-exempt status from the Internal Revenue Service.
The primary requirement that a charitable nonprofit LLC must fulfill to receive tax-exempt status is to have a qualifying mission statement. The mission statement, as detailed in the articles of organization, must state that the group's mission is of a charitable, religious, scientific, literary or educational nature. The IRS will examine the mission statement, along with the remainder of the application paperwork, to determine if the group qualifies for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code.
Tax Exemption Application
A nonprofit LLC that receives tax-exempt status is not obligated to pay federal taxes on its income. Not only does this exemption allow nonprofit groups to funnel their funds toward their charitable efforts rather than toward taxes, but donors who give to a tax-exempt nonprofit can also deduct their donations on their personal income taxes. The application form is several pages long and requires that the group disclose much of its financial data, such as gifts, investment income and expenses.
Although nonprofit LLCs are exempt from income taxes, these groups still must file annual returns detailing their income and expenses with the IRS. A nonprofit that makes more than $50,000 in annual revenue must file a Form 990, while those that bring in less than $50,000 must file a Form 990-N "e-postcard." Any nonprofit organization that fails to file the required forms for three consecutive years will automatically lose its tax-exempt status.
Unrelated Business Income
If the group brings in any substantial income from an unrelated business, it must file a tax return on that unrelated business income. Unrelated business income is revenue from a business that the group operates that is not closely related to the group's charitable purpose. For instance, if a church offers tours of the Holy Land for its members but does not offer any religious instruction during these trips, the income from those tours is from an "unrelated business," and the church must file a tax return on that income.
- Internal Revenue Service: Limited Liability Companies as Exempt Organizations –- Update
- Nolo: How to Obtain 501(c)(3) Tax-Exempt Status for Your Nonprofit
- Northwest Registered Agent: LLC General Articles of Organization
- Internal Revenue Service: Exempt Organizations -- Required Filings
- FindLaw: Becoming a Tax-Exempt Organization
- IRS: Tax-Exempt Status for Your Organization
- IRS: Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
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