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Nonprofit LLCs

  • 1.  Nonprofit LLCs

    Posted 18 days ago

    I'm hoping that someone in the community has done the hard thinking about an issue that surfaced recently.

     

    The question at hand is to make sure that we are correctly categorizing entities that are (probably) not themselves non-profits, but that may be organized for philanthropic purposes, possibly in partnership with a foundation and/or as a social benefit or impact investing agency of a wealthy individual, and that are typically organized as LLCs.  I'm thinking of LLCs like Breakthrough Energy Ventures, Pivotal Ventures, the Chan Zuckerberg Initiative, the Emerson Collective, etc.

     

    The current thinking is that, since these LLCs aren't primarily organized to generate profits, they would be better classified as Other Organizations than Corporations.

     

    If that's the case, then the next question is how one identifies these sorts of organizations, beyond the ones that show up in the headlines.  They all seem to be LLCs, but, as I understand it, not all LLCs are organized and operated for charitable purposes.  So, for example

    A limited liability company (LLC) is a legal form of enterprise, owned by one or more members, that may be organized and operated for a wide variety of purposes, including charitable purposes. One of the major advantages of an LLC is the limited liability protection it offers to its members. Members are generally not liable for the debts and obligations of the LLC except to the extent of their investments in the LLC.

    While technically, there is no such thing as a nonprofit LLC in the vast majority of states (Minnesota, Tennessee, and Kentucky being notable exceptions), there are tax-exempt LLCs, and these entities are commonly referred to as "nonprofit limited liability companies" or "nonprofit LLCs". https://nonprofitlawblog.com/nonprofit-limited-liability-company-2/

    Further, the IRS treatment of LLCs seems to vary quite a bit depending on how the LLC elects to file with the IRS, possibly as anything from a corporation to a partnership to a disregarded entity (that files its taxes on an individual's personal tax return). (cf. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc)

     

    Has anyone effectively sorted out this thicket?  Is there any straightforward way to identify nonprofit LLCs, and how are you classifying them?

     

    Thanks in advance,

     

    Alan

     

    Alan S. Hejnal (he/him/his)

    Data Quality Manager

     

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  • 2.  RE: Nonprofit LLCs

    Posted 18 days ago
    Hi Alan, 

    I don't know if there's a way out of this thicket that is straightforward. For example, one of my nonprofit clients is dropping down an LLC to run a few of business lines that are subject to UBIT because if the nonprofit runs them, each separate business line is assessed separately, and losses from one line cannot defray taxable gains from another. But if an LLC is running them, the LLC is taxed on its overall gains, regardless of how the different business lines perform. So here's an example of an LLC, owned by a nonprofit, that is organized to make a profit. But from the outside looking in, how would you know? 



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