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 a nonprofit corporation.
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 corporation 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 Non-Profit:
There are several steps involved in order to convert an LLC to a nonprofit corporation. These include:
- Review state laws and regulations governing the conversion process.
- Draft articles of incorporation for the new nonprofit corporation.
- 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.
- Dissolve the LLC and provide a name for your new corporation while designating a registered agent.
- Apply for tax-exempt status or nonprofit status with the Internal Revenue Service ( IRS) and file form 1023
- 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.
- 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.
It is essential to consult with a law firm for experienced legal advice or an accountant before proceeding.
Can a Single-Member LLC Be a Nonprofit?
No, a single-member LLC cannot be a nonprofit. A non-profit must have at least two members.
Is There a Filing Fee for Converting an LLC to a Nonprofit Organization?
Yes. The filing fee will vary depending on the state, but it is generally between $250 and $1,000.
You should check with your state before proceeding.
Before proceeding with any entity conversion from LLC to a non-profit organization, 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.