Can a Nonprofit Be an LLC?

A nonprofit organization and a limited liability company (LLC) are two business entities. The former can enjoy tax-exempt status and doesn’t exist to make a profit, while the latter is a for-profit business structure. 

They’re very different, but there may be cases where you want to convert a nonprofit to an LLC and want to know if it’s possible. This guide will provide the answer.

Key Takeaways

• It is possible to convert a nonprofit to an LLC, though the process can be quite complex and varies from state to state.

• Depending on where your nonprofit is based, you may elect to convert to an LLC via a statutory conversion, statutory merger, or non-statutory conversion.

• All nonprofit LLCs must adhere to specific IRS rules to maintain tax-exempt status.

Nonprofit vs. LLC

Before we look at the details of how to convert a nonprofit organization into an LLC, it’s essential to look at how these two business structures compare.

Purpose

Nonprofits are typically charitable organizations and do not exist to make a profit. Revenue raised is reinvested into the organization or used for charitable purposes rather than paid out to any shareholder or board of directors. 

An LLC, meanwhile, is a for-profit entity that aims to make money for its owners or LLC members.

Common Examples

Nonprofit corporations include charities, churches, museums, and research institutions. 

In contrast, LLCs can be much more diverse, from technology companies to retail businesses, restaurants, builders, and more.

Taxes

Nonprofits are typically tax-exempt organizations. That means they don’t have to pay state tax. 

LLCs have to pay taxes, though usually benefit from pass-through taxation in most states, with taxes passing through to the members’ own tax returns.

Benefits

One of the best benefits of nonprofits is their eligibility for tax-exempt status, freeing the directors and members from state tax obligations. 

On the other hand, LLCs have multiple benefits of their own, like flexible management, liability protection, and pass-through taxation.[1]

Shifting from a nonprofit status to an LLC has many perks. It can enable multiple nonprofits to merge together, open up new avenues of potential work and focus for the company, introduce more management options, and provide liability protection for the owner’s personal assets.

How to Convert Nonprofit to LLC

There are several reasons why you might want to change a nonprofit to an LLC. However, the process of switching from a nonprofit organization to a limited liability company can be quite complicated, and the exact steps involved vary from state to state.

Interested nonprofit corporation owners will need to consult their own specific state laws on the matter and use one of the three methods listed below to convert.

1. Statutory Conversion

The simplest way to convert a nonprofit corporation to an LLC is via statutory conversion. However, this method is not available nationwide, being limited to just 35 states at the time of writing. 

In addition, the process can vary slightly from one state to the next but generally involves the following steps:

1. Agree on a conversion plan, holding a vote to approve it.

2. Complete a Certificate of Conversion, which usually contains information like the name of your business, the type of converted entity you wish to form, contact details, and signatures.

3. File the completed Certificate of Conversion with the Secretary of State.

4. Prepare and file all relevant LLC organizational documents, like the Articles of Organization and an LLC operating agreement, and pay the required filing fee.

5. Dissolve your original nonprofit corporation.

2. Statutory Merger

When multiple nonprofit organizations wish to merge into a nonprofit limited company, a statutory merger is the best way forward. 

In a statutory merger, one or more nonprofit organizations essentially dissolve into another to form a single entity. The assets and liabilities of the dissolved nonprofits pass over to the surviving one. 

This process involves the following steps:

1. All relevant heads and board members for each nonprofit meet to discuss the terms of the merger.

2. A vote may need to be held to ensure that the merger has the full support of all those involved.

3. A Certificate of Merger is filled out and filed with the relevant state agency.

4. Once the certificate has been filed, the dissolved nonprofits cease to exist and become part of the new, larger company.

3. Non-Statutory Conversion

The final method, and the most tedious, is a non-statutory conversion. This is an antiquated way of converting business entity types which is gradually being phased out in favor of the statutory conversion system. However, if you’re based in a state that doesn’t yet allow for statutory conversions, the non-statutory method may be the only one available to you.

This involves forming an entirely new business entity. Then, a vote takes place to approve a merger between your existing nonprofit and the new LLC entity. All of the original nonprofit owners will have to trade in ownership of the original entity for the new one.

A Certificate of Merger will usually be required, along with LLC formation documents, plus all the usual LLC set-up steps, like obtaining an EIN from the IRS.

IRS Requirements for Nonprofit LLCs

An alternative way to convert a nonprofit to an LLC is to switch to a nonprofit LLC. Also known as a “nonprofit limited company,” a nonprofit LLC retains certain aspects of nonprofit organizations while gaining several key features of an LLC. 

The IRS has a list of rules that you’ll need to follow to run a tax-exempt entity like a nonprofit LLC.[2] Those IRS rules include:

• Organizational documents (LLC operating agreement) must clearly state that the LLC is operated for a nonprofit or charitable purpose

• Organizational documents must clearly state that the LLC’s activities involve one or more tax-exempt objectives

• Members must meet the requirements of 501(c)(3) organizations according to the Internal Revenue Code

• Organizational documents should prohibit any transfer of membership or interest in the company to those who are not 501(c)(3) organizations or governmental units

• Interests or assets of the company can only be transferred for fair market value

• Assets of the LLCs must be devoted to charitable purposes if the company is dissolved, meaning the company cannot become or convert into a for-profit corporation, like a corporation or limited partnership

Nonprofit to LLC: Final Steps

To completely change a nonprofit to an LLC, you’ll have to follow the typical steps involved in LLC formation. That includes filing the Articles of Organization with the Secretary of State. You’ll also need to pay a state fee as part of the filing process.

In some states, it’s also mandatory to have an LLC operating agreement, which outlines how your company will be run, how votes will work, how profits and losses are distributed, etc. In addition, you’ll typically need to nominate a registered agent to accept the service of process on behalf of your company.

The final steps involve acquiring an Employer Identification Number (EIN) from the IRS so that you can open a business bank account and hire employees for your new for-profit company.

FAQs

Can a nonprofit be an LLC?

Yes, a nonprofit can either be fully converted to a for-profit LLC or can be turned into a nonprofit LLC.

How do you convert a corporation to an LLC?

There are multiple methods you can use to convert a corporation to an LLC, such as statutory conversions and statutory mergers.

What is the difference between an LLC and a corporation?

LLCs and corporations are two different kinds of business entities with separate management systems and taxation. The biggest difference is that an LLC is owned and operated by its members, while corporations are owned by shareholders.

What are the disadvantages of forming an LLC?

Some of the disadvantages involved in setting up LLCs can include the state fees and annual report fees, as well as difficulty when trying to transfer ownership.

Bibliography

1. U.S. Small Business Administration. “Choose a Business Structure.” Accessed January 16, 2024.

2. Internal Revenue Service (IRS). “Exemption Requirements - 501(c)[3] Organizations.” Accessed January 16, 2024.