Last updated: September 19, 2022

The terms "LLC" and "non-profit organization" are generally interchangeable to the average person.

There are, however, significant differences between these two types of businesses that should be understood before proceeding with a conversion to one or the other.

Understanding The Difference Between an LLC and a NonProfit Corporation

An LLC is a business entity that is formed under state law. It provides limited liability protection to its owners (the "members") and is taxed as a partnership or sole proprietorship.

A nonprofit organization, on the other hand, is a tax-exempt entity that is usually created to carry out a specific charitable or public purpose.

There are several key issues that must be understood before converting an LLC to nonprofit liability companies.

Conversion Requirements:

Woman checking requirements on laptop and comparing that on her document

Owners of an LLC wishing to convert to a non-profit corporation must comply with certain laws and regulations.

Review with your state agency the laws because the state laws vary, but there are several key issues that should be considered before attempting any conversion. State agency required paperwork may include:

1) The Formation of A New, Separate Non-profit Organization:

This will generally consist of reserving the organization's name and filing articles of incorporation with state authorities. The non-profit organization can either be wholly independent of the LLC.

2) The Transfer of Assets from the Existing LLC to the New Non-profit:

You may need to create an operating agreement between the members and owners.

The operating agreement must include section 501(c)(3) of the Internal Revenue Code that requires every charity, educational institution, research organization, and religious organization to include provisions that prevent the nonprofit limited liability company from engaging in commercial activities that are unrelated to education, charity, science, or religious purpose.

3) The Dissolution of the LLC:

While your state may allow for an LLC to convert into a different type of business, it will still require you to dissolve the original LLC.

Depending on the laws, this can be done by either phasing out the business over time or dissolving immediately.

4) Understand of Tax-Exempt Status:

Converting a Limited Liability Company to a nonprofit can have significant tax consequences.

Most notably, the conversion will result in the loss of the LLC's limited liability protection.

In addition, the new non-profit may be subject to certain taxes, which the LLC was previously exempt from, and can accept tax-deductible donations.

So you've decided that converting your LLC into a nonprofit is the right move for your business. What's the next step?

7 Steps to Convert Your LLC to a Nonprofit Corporation:

Woman comparing two different files in her office

There are several steps involved in order to convert Limited Liability Companies to nonprofits. These include:

  1. Review state laws and regulations governing the conversion process.
  2. Draft articles of incorporation for the new nonprofit business.
  3. Transfer LLC assets and debts to the new corporation by drafting a business asset transfer agreement that would automatically transfer the assets. Take care that if you filed an Articles of Incorporation, then that means that you need to manually transfer the LLC's assets and debts to your new organization.
  4. Dissolve the LLC and provide a name for your new corporation while designating a registered agent.
  5. Apply for tax-exempt status or nonprofit business status as a 501 C 3 organization with the Internal Revenue Service (IRS) and file form 1023
  6. Create a Unanimous vote and then notify members of the conversion as per the operating agreement and provide them with updated information about the new non-profit organization.
  7. Take steps to ensure that the new nonprofit corporation is in compliance with state and federal laws.

To convert from an LLC to a new corporation can be a complicated process, even with a registered agent.

It is essential to consult with a law firm for experienced legal advice or an accountant before converting into tax exempt organizations.

FAQs

Can a Single-Member LLC Have a Nonprofit Status?

No, a single-member LLC cannot be a nonprofit organization. Nonprofit corporations must have at least two members to qualify as tax exempt nonprofit organizations.

Is There a Filing Fee for Converting an LLC to a Nonprofit Organization?

Yes. The filing fee to become a nonprofit LLC will vary depending on the state, but it is generally between $250 and $1,000.

You should check with your state before proceeding.

Does an LLC Need a New EIN as a Nonprofit Corporation?

Yes, the LLC needs a new EIN after transitioning into a nonprofit corporation. After all, your corporate structure transformation from a for-profit business to a non-profit one will change your default tax status from "partnership" to "corporation." Aside from applying for a new EIN, the nonprofit corporation should file Form 8832 with the Internal Revenue Service. Doing so will change their tax status to the appropriate one.

What to Do After Forming a Nonprofit Corporation?

After forming a nonprofit corporation, here are some ways to maintain the business:

  • Making non-profit bylaws
  • Getting a new EIN
  • Applying to achieve a tax-exempt status
  • Obtaining the appropriate business licenses and permits
  • If applicable, registering as a charitable institution
  • Filing state compliance reports for non-profit businesses

Consider the state's specific exemption offerings for non-profit companies for tax exemptions. These are offers to look into since they could help the business flourish. Go to the IRS and apply for tax-exempt status at a federal level. However, you must meet the IRS Exemption requirements.

Look for a law firm or other professionals to help complete these and qualify for tax exemption. These people can also help you discover other non-profit benefits you might have missed.

Once you achieve the tax-exempt status, you must regularly file all the required paperwork to maintain it. It applies to both federal and state agencies since the latter may have varying requirements. For example, the IRS requires non-profit corporations to file Form 990 every year.

Conclusion:

Before proceeding with any entity conversion from LLC to a nonprofit organizations, it is important for owners of the LLC to understand both the benefits and consequences of the conversion, as well as the laws that may apply.

By following the steps outlined above, you can ensure a successful LLC conversion.

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