Can a Nonprofit Own an LLC and Can It Run It? Understanding the Legalities and Requirements
Can a Nonprofit Own an LLC and Can It Run It? Understanding the Legalities and Requirements
Yes, a nonprofit can both own and run an LLC or for-profit business while also being in compliance with the IRS's rules and regulations for a 501c organization. There are a few legalities you'll need to be aware of staying in compliance with in order to know if you're jeopardizing your nonprofit's tax exempt status or not. This is due to the many rules and regulations the United States IRS has set forth for situations like this, and how they handle the income created by a for-profit llc connected to a nonprofit.
Continuing to stay in compliance on a federal, state and local level is always an issue. And the consequences of not following the guidelines set out by these governmental institutions can lead to both types of organizations experiencing legal problems. There are legal issues like pass-through taxation on income generated by the business and how the nonprofit corporation accepts this income. So read on to see what exactly can and can't be done when it comes to a nonprofit owning a llc.
Differences Between a Nonprofit and a For-Profit?
The differences between a nonprofit and a for-profit are right there in the names of the two different forms of entities. A nonprofit means the charity is set up to help the world in some positive way and is not meant or expected to make a profit. It is also not an owned entity in the same way that for-profits are, which means no one within the organization can own, sell or profit from the nonprofit corporation. Furthermore, there is a law that states that nonprofit financial statements are public records and must be disclosed by anyone seeking the information according to the IRS (in the United States) to continue receiving their tax exempt status privileges and avoid any legal issues that could cause the business to no longer be exempt.
Almost the opposite is true for an llc enterprise, or Limited Liability Company (LLC) which is formed for the sole purpose to make their owner's or shareholder's some sort of profit on their products or services. An LLC is also an owned entity, meaning they are free to be bought and sold at any time and to any other individual or company unlike a nonprofit according to current IRS rules. These types of corporations are also private, and they do not need to disclose any financial records unless they are a publicly traded company on some sort of exchange, or in very rare instances they are structured as a nonprofit llc. There are many types of LLCs you can establish depending on your charity's charitable goals, but first let's look at why an organization would even want to create a for-profit business in the first place.
Why Would a Nonprofit Own a For-Profit?
There are a lot of reasons a nonprofit corporation may end up owning a for-profit or llc. One reason can simply be someone donated their company to the charity as a donation in their will or living trust, perhaps as a planned gift or through a donor's charitable trust. If this is the case, it is completely legal for the 501c to both own and run the for-profit company or LLC, and even accept a part or all of it's profit in the form of a donation from the for profit to the nonprofit. But of course there are strict IRS guidelines that we'll go into more depth later in this article that must be adhered to in order to not jeopardize your nonprofit organization's exempt status.
Another reason a not-for-profit organization may decide to proceed with an llc formation is it may own copyrights, land or other assets that can produce revenue, but in order to maximize the potential of the product or service, an LLC is structured to both protect the charitable nonprofit business from any liabilities as well as allowing the llc to be free to grow without any of the limitations often placed on nonprofits in order for them to keep their tax exempt status.
Often these sorts of companies are aligned in some way with the nonprofit's overall charitable business goals. For example, an animal charity may start making its own version of healthy pet food at home. Over time more people come into contact with their pet food and orders start rolling in. After a while the charity can see that this would be a very lucrative way of funding the charity while also keeping in line with their own charitable goals, but the charity simply isn't set up as a proper for-profit llc.
Nor does it have the employees and infrastructure that would be needed to make the business grow. By setting up an llc with the charity as the sole owner of the llc, this protects the charity from any insurance liabilities the new pet food company may experience, while giving the company freedom to grow and prosper following its own mission statement or business plan without the restrictions of a 501c corporation or association.Things as simple as hiring and paying employees becomes much easier with an llc than a 501c.
Legal Frameworks for a Nonprofit LLC - llc Formation
One of the most popular reasons why charitable nonprofits may choose to form their own llc is to limit organizational liability issues stemming from the products or services they're selling. This allows the parent nonprofit corporation to enjoy the income benefits derived from the LLC's success, while greatly diminishing any type of liability issues or law suits that may arise at some point. There are also some other advantages and disadvantages of using a corporate structure as a subsidiary, but it will be easier to demonstrate each of them on a case by case basis. See our list of the different legal corporate structures nonprofit organizations can employ below for their business and organization and what the law states about each one.
There are a lot of different IRS regulations regarding what is and isn’t allowed and we highly advise seeking out professional help with these.
Single-Member Limited Liability Company (SMLLC)
In order for a non-profit to benefit from this type of incorporation, it must specify with the IRS that it want to be seen as a corporation and not a "disregarded entity" or any income from the llc will be taxable even though the charity is a 501c corporation.
If your charity does opt to create a single member limited liability company, the nonprofit organization will be considered the sole owner (member) of the LLC. The charity must be aware of how profits are shared with their charity or you may be subject to pass-through taxation. The easiest way around this, although always consult your financial advisor or lawyers, is to wait until the end of the tax year to see what your profit is, and then to make that amount a donation to the parent nonprofit.
There are still many advantages to this type of corporation structure. The charity or nonprofit corporation still enjoys liability protection and is free from any problems the nonprofit llc encounters and can’t be sued or have a lien placed on any of the charity’s assets if something serious does happen. Your charity may benefit from forming a smllc subsidiary to receive and manage real property in some cases.
Wholly Owned For-Profit Corporation
The wholly owned for profit corporation llc is also an option when a nonprofit organization needs to engage in revenue-generating activities while maintaining a clear separation between their nonprofit and for-profit or llc operations and organizational documents. And just like all the corporate structures on our list, this form of llc also shields the parent nonprofit and its board of directors from any liability issues that may arise.
The one major difference between this corporation and the single member limited liability company above is with a wholly owned llc, your charity owns all the shares it issues and can issue more with the approval of its board members. This will give your organization the option of selling shares at a later date, or allowing the distribution of shares to individuals in the form of compensation or hiring perks to attract talented employees or raise funds for expansion.
Benefit Corporation (B Corp)
A Benefit Corporation is still an LLC and shares all the same privileges as the other legal business structures on our list. What separates this type of legal business structure from the others on our list is the “Benefit” aspect of the business. Benefit corporations are often set up by companies that want to make a profit, but at the same time create products and services that help the world in some way much like a nonprofit organization. Although they do not specifically make goals for what they do, they do follow their mission statement when it comes to what types of products and services they are looking to sell, market and create.
Keeping with the example of an animal charity creating an llc to market and selling a line of healthy pet food alternatives, it would be beneficial to create a benefit llc simply because their products are means to improve the lives of the animals eating them. There is a mission behind the products that is expressively helping improve the world in some way, and not just to make a quick buck. And even better, this mission aligns with the organization parent company as well.
Low-Profit Limited Liability Company (L3C)
Much like a true nonprofit organization, a low-profit limited liability company’s (L3C) primary focus is on achieving a social or environmental mission while still creating profits, but the profits are secondary to their cause and impact. This aligns well with a nonprofit that needs to create a llc subsidiary for the purpose of using assets like land or copyrights but still wants to use the income generated for social purposes.
One of the biggest advantages to these types of corporate structures is their ability to attract grants and program-related investments from foundations that have similar mission statements. These mission-related investments (MRIs) often stem from investors that are motivated by both financial returns and the desire to contribute to a social or environmental cause. For our pet food company example, this type of llc would be perfectly aligned with the animal shelter’s mission as well as still giving a return on the investment made to start the L3C.
There are definitely options when it comes to forming a organizational llc business as a subsidiary of your nonprofit, and this legal entity can exist as a nonprofit limited liability company as long as you follow the law and legal matters when it comes to tax or other business matters. Some will even align with your charity's cause and mission, and even help attract investors and foundations to your company. It's best to speak to an attorney if you're in the states when it comes to choosing which corporate structure would be most beneficial for your nonprofit's specific circumstances.
How PayBee Can Can Help
Creating nonprofit llcs in order to take advantage of the current charitable business law set out by the IRS and other state laws so your organization can enjoy both tax free status as well as avoiding any legal issues is a smart way to do business. But keeping both legal entities and their income separate and following all the laws in order for your organization to stay exempt and there are no tax implications or other legal hassles means keeping excellent business records.
This is where having a software platform like PayBee can really help your charitable business as well as your llc grow. Our backend can help you with your legal and tax law issues by keeping detailed records of both businesses, thus making sure each business is seen as a distinct entity in the eyes of the law and avoiding any legal issues or tax concerns. With detailed tax receipts for donors to a complete bookkeeping system, all of your business information is as easy to find as clicking a button. Take a free demo tour now to understand how all of our features and tools can help your business succeed and thrive right now.
Can an LLC be a non-profit?
No, an LLC (Limited Liability Company) cannot be a nonprofit for two important reasons. First an LLC is a for-profit business structure, and its primary purpose is to generate profit for its members or owners where a nonprofit is exactly the opposite. Second, in order to establish an llc, there must be an owner or shares created for the business, nonprofits do not have either and are never owned by an individual, its members or a corporate entity.
Can for-profits own nonprofits?
No, a for-profit can not own a nonprofit, technically no one can. A for-profit or llc can start a nonprofit organization and fund it, but the corporation will not own the nonprofit entity or any of its assets and can not benefit financially from its operations. However, collaborations between for-profits and nonprofit organizations are common.
Differences between a Low-Profit Limited Liability Company (L3C) and a Benefit Corporation (B Corp)?
Although a L3C and B Corp both balance profit-making with social or environmental goals, L3Cs are designed to prioritize specific social or environmental objectives above any profits whereas B Corps are legally required to demonstrate they do indeed make a difference, but still their primary goal is to also make profits for its owner or shareholders.