How to Convert an LLC to a Non-Profit Organization? (Guide)
A change in the purpose and nature of an LLC may cause the company to convert into a nonprofit organization.
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.
As someone with extensive knowledge and expertise with limited liability companies and over a decade of practice, I've compiled a comprehensive guide to help you convert your company into a nonprofit organization.
The article is backed by research, legal information, and personal experience.
- Converting an LLC to a nonprofit organization entails the formation of a new entity, the transfer of assets, and the dissolution of the former company.
- Any business entity may only qualify as a nonprofit organization if the company embarks on endeavors related to charity, education, research, or religion.
- Per the National Center for Charitable Statistics, the U.S. has over 1.5 million nonprofits, highlighting their crucial societal roles.
- State laws and regulations and changes in internal documents have to be adhered to to legally convert an LLC into a nonprofit organization.
7 Steps to Convert Your LLC to a Nonprofit Corporation
Based on our experience, we followed these steps to convert our LLC to a nonprofit corporation. These steps include:
- Review state laws and regulations governing the conversion process.
- Draft articles of incorporation for the new nonprofit business.
- Transfer LLC assets and debts to the new corporation by drafting a business asset transfer agreement that would automatically complete the transaction. If you filed an Articles of Incorporation, 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 non-profit registered agent.
- 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.
- Create a Unanimous vote and then notify members of the conversion as per the LLC operating agreement and provide them with updated information about the new non-profit organization.
- Take steps to ensure that the new nonprofit corporation complies with state and federal laws.
Converting from an LLC to a new corporation can be a complicated process, but the purpose of this article is to simplify the procedure.
We recommend seeking legal advice before converting the LLC into a nonprofit organization.
Understanding The Difference Between an LLC and a NonProfit Corporation
To understand the difference between an LLC and a nonprofit corporation, it is important to note the nature of the entity and its business purpose.
An LLC is a profit-oriented 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. According to the National Center for Charitable Statistics, there are over 1.5 million nonprofit organizations in the United States, underscoring their role in fulfilling diverse societal needs.
Several key issues must be understood before converting an LLC to a nonprofit liability company.
"While your business may be eligible to transition from an LLC to a nonprofit, it's important to note that you'll relinquish complete control over your business, as decisions will be governed by the board of directors or trustees."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
State laws regarding conversion requirements vary, so we recommend being aware of the regulations that apply to your company.
Owners of an LLC wishing to convert to a non-profit corporation must comply with specific procedures.
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.
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 as per the operating agreement.
4. Understand Tax-Exempt Status
The primary significance of converting a Limited Liability Company to a nonprofit is tax benefits. The new non-profit organization is exempt from taxes since the entity does not pursue monetary gains . According to the Internal Revenue Service, this results in over 90% of registered non-profits benefiting from significant tax savings annually.
However, the conversion will result in the loss of the LLC's limited liability protection.
Can a Single-Member LLC Have a Nonprofit Status?
A single-member LLC cannot have a nonprofit status. Nonprofit corporations must have at least two members to qualify as tax-exempt organizations.
Is There a Filing Fee for Converting an LLC to a Nonprofit Organization?
There is a filing fee for converting an LLC to a nonprofit organization. The rates range from $250 to $1,000.
You should check with your state before converting your for-profit entity to reap tax exemption benefits.
Does an LLC Need a New EIN as a Nonprofit Corporation?
The LLC needs a new EIN after transitioning into a nonprofit corporation since the conversion will change your default tax status from "partnership" to "corporation."