Feb 06, 2010

A Nonprofit LLC?

In our last post we introduced a new type of LLC, the series LLC. Here we'll talk about another interesting way to use the limited liability company, the nonprofit LLC.
Nonprofit LLCs are usually formed by larger nonprofit corporations to house some of their activities. Some larger tax-exempt nonprofit organizations like to segregate nonprofit funds or assets in a nonprofit LLC. The assets of the nonprofit LLC must be irrevocably dedicated to nonprofit purposes, and the LLC cannot pay out profits to its members. 
As another strategy, some larger nonprofits form a regular profit-making LLC to place a limited liability shield around some of the nonprofit's unrelated business activities (activites that bring in a profit and are only tangentially related to the nonprofit's mission). As long as the LLC's income and activities are insignificant, relative to the overall income and activities of the parent nonprofit, this arrangement may pass muster with the IRS. The parent nonprofit has to pay income taxes on profits it receives from its LLC subsidiary. Next, up a hybrid LLC called the L3C, which has a mix of profit and nonprofit motives. 

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).