Do you have a love for helping the local community? Are you always trying to find ways to support causes close to your heart? Then as a small business owner, you may already be proactive about these things.
But some people choose to take it one step further. While a limited liability company (LLC) comes with its perks, a nonprofit organization can better fit your goals while providing even more advantages.
Can you even convert an LLC to a nonprofit company though? And if you can, then how do you do that? Read on to find out more.
Can You Change an LLC to a Nonprofit Company?
Can an LLC be a nonprofit? Well, the simple answer to this question is “yes”. However, you should be aware that it’s a huge undertaking that may result in unintended tax implications, so it may not be worth it for every business owner.
In addition, every state has its own differences in laws and regulations. In fact, many don’t actually allow you to convert this type of conversion.
On top of that, an LLC can only be a nonprofit if it’s owned by one tax-exempt organization.
Here are some other requirements that the IRS has for an LLC 501(c)(3):
- Activities are restricted to exempt objectives
- You must solely focus on a nonprofit purpose
- You can’t merge or become a for-profit business
- Members have to be 501(c)(3) organizations or a governmental unit
- Interests and assets can only be transferred to a nonmember that’s not a 501(c)(3) organization or government unit; this must be for a fair market value
- Assets given to charities must still be given upon the nonprofit’s dissolution
- If you make amendments to organizational documents, you still need to follow 501(c)(3)
- Assets can’t be given to members who stop being a 501(c)(3) organization or governmental unit
Create a Low-Profit LLC Instead
It’s tough to meet all of the IRS’s requirements for changing an LLC to nonprofit. If you aren’t able to meet them, then you can consider making a low-profit LLC (L3C).
This is a relatively new type of business entity that combines the best of both worlds. However, it’s limited to only a few states (Illinois, Louisiana, Maine, Michigan, Rhode Island, Utah, Vermont, and Wyoming). Plus, L3Cs are not tax-exempt.
On a more positive note, you only need to meet three requirements to create an L3C:
- Meet the definition of “charitable” or “educational” purpose under Section 170(c)(2)(b)
- Main purpose isn’t income or appreciation off property
- Purpose isn’t political or legislative
How to Convert an LLC to Nonprofit
If you’re fortunate enough to be in a state that lets you convert an LLC to a nonprofit organization, then that’s half the trouble gone. Here are the general steps you’ll need to take.
Conduct Initial Research
As we’re only giving you broad advice, it’s best if you do your due diligence and perform research on your own first. That way, you’ll understand the nuances regarding the requirements and regulations for nonprofit organizations in your particular state.
More importantly, this will also help you determine if your LLC’s activities and goals align with the charitable and tax-exempt purposes of a nonprofit company. You might realize that this isn’t the right direction to take your business, or that your state doesn’t let you perform this conversion. So you can stop here rather than continue with an arduous road that won’t produce satisfactory results.
Hold a Shareholders Vote
This isn’t legally required in every state, but generally speaking, you’ll have to hold a vote with your LLC’s shareholders. To convert the LLC into a nonprofit company, you’ll need a majority vote.
The exception is if your business has an operating agreement that outlines specific instructions for changing things up. In that case, follow those steps.
File Articles of Incorporation for Your Nonprofit
You’ll be going from an LLC to a corporation, so you’ll have to file articles of incorporation with the agency for business organizations in your state, which is usually the Secretary of State. Do note that in some locations, you can file articles of conversion instead.
With this new corporation, you’ll have to appoint a registered agent. You can use our services, which are comprehensive and affordable. You’ll be able to concentrate on running your nonprofit business, as we’ll keep track of all your admin work.
[fusion_button link=”https://businessanywhere.io/registered-agent-service/?utm_source=convert-llc-to-nonprofit/” text_transform=”” title=”” target=”_self” link_attributes=”” alignment_medium=”” alignment_small=”” alignment=”” modal=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” color=”default” button_gradient_top_color=”” button_gradient_bottom_color=”” button_gradient_top_color_hover=”” button_gradient_bottom_color_hover=”” accent_color=”” accent_hover_color=”” type=”” bevel_color=”” border_width=”” border_radius=”” border_color=”” border_hover_color=”” size=”” stretch=”default” margin_top=”” margin_right=”” margin_bottom=”” margin_left=”” icon=”” icon_position=”left” icon_divider=”no” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Use Business Anywhere Registered Agent Services[/fusion_button]
Transfer Your Assets and Debt
All of your LLC’s assets and debt need to be transferred to your new nonprofit organization. It’s likely that specific laws and regulations apply, so it can be beneficial to consult with a lawyer. They can also help you draw up a transfer agreement.
The good news is, if you’re allowed to file articles of conversion, all assets and debt will automatically transfer to the nonprofit business.
Write Up an Operating Agreement
There are crucial things you need to include in a nonprofit’s operating agreement, which are listed above in the section of IRS requirements. Because you’ll be a nonprofit organization, you’ll have a limited scope, such as in the industries of education and science.
File Form 1023
The IRS provides Form 1023 for organizations to use if they want to be exempt from federal income tax under Section 501(c)(3). It’ll cost either $400 or $800, depending on your gross receipts.
It’s highly recommended that you have a tax attorney to help you file, as it’s a long and complicated form. If your form’s rejected, then this will delay your conversion process, which can create a chain reaction of obstacles for your organization.
File as a Charitable Organization
Lastly, you’ll have to file as a charity with the Attorney General. There are different forms used in each state; for example, in Illinois, you’ll fill out the AG990-IL form.
Dissolve Your LLC to Make a Nonprofit Company
The other option is to completely dissolve your LLC to create a new nonprofit business. It’s similar to the conversion route, but with some small differences. Most notably, you’ll have to fill out dissolution documents with the Department of State.
If you want to keep your old business name, then you’re in luck. Most states allow you to reuse those from dissolved companies.
Will You Turn Your LLC Into a Nonprofit Company?
As time goes on, it’s natural for your business goals to change. So it’s not uncommon for small business owners to look into changing their company structures.
However, to convert an LLC to a nonprofit, you need to go through numerous steps. Plus, the process brings a number of complicated consequences.
For many, this isn’t worth the time and money spent, and that’s okay, especially since conversions aren’t recommended anyway. In that case, you can keep your LLC and focus more of your efforts on the causes you’re passionate about.
If you’re deciding against a nonprofit conversion, and you haven’t even started a company yet, then use our business registration services today.
[fusion_button link=”https://businessanywhere.io/business-registration/?utm_source=convert-llc-to-nonprofit/” text_transform=”” title=”” target=”_self” link_attributes=”” alignment_medium=”” alignment_small=”” alignment=”” modal=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” color=”default” button_gradient_top_color=”” button_gradient_bottom_color=”” button_gradient_top_color_hover=”” button_gradient_bottom_color_hover=”” accent_color=”” accent_hover_color=”” type=”” bevel_color=”” border_width=”” border_radius=”” border_color=”” border_hover_color=”” size=”” stretch=”default” margin_top=”” margin_right=”” margin_bottom=”” margin_left=”” icon=”” icon_position=”left” icon_divider=”no” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Register your Business Today![/fusion_button]
