Why Your New York (or Other) Business Limited Liability Company will Not Qualify for Non-Profit/Tax Exempt 501c3 Treatment
There is a common misconception that you can take any business entity and turn it into a non-profit. That is simply not true. First and foremost, most states have a dedicated category of business entity that must be organized as the basis for state tax exemption (there are two levels of exemption, state and federal). In New York, you must choose one of the various “types” of not-for-profit corporation types. And even after successfully organizing such a New York not for profit business corporation, one must still apply for New York State AND federal tax exempt status.
That brings up another point, nearly every not for profit business entity that successfully applies for federal and state tax exempt status is a corporation, NOT a limited liability company (they are different fundamentally for tax purposes and especially so in the not for profit context). LLC’s typically do not qualify for tax exempt status and that is per the Internal Revenue Service itself.
Simply put, the IRS is leery of bestowing 501 status, unless the members of an LLC themselves are tax exempt organizations. Absent that situation, that might present problems under the “inurement” section of 501 (501(c)(6)).
This is a quote from an IRS publication on the issue of not for profit LLC’s.
“Because state laws generally provide LLC members with ownership rights in the assets of the LLC, the Service is concerned that allowing non-exempt members would result in potential inurement problems. Thus, the LLC cannot have private shareholders or individuals as members, and its organizing documents must state a purpose to further the members’ charitable purposes. It should be noted, however, that the presence of solely charitable members does not ensure that the organization will be operated exclusively for charitable purposes. “
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