You have probably heard of a Nonprofit Corporation, but have you ever heard of a Nonprofit Limited Liability Company? Over the last several years I have seen numerous times where people intending to form a nonprofit and seek recognition from the IRS as a 501(c)(3) have mistakenly started by forming a Nonprofit Limited Liability Company (“NPLLC”). A NPLLC and a Nonprofit Corporation are completely different types of entities and should not be confused. Tennessee is one of only a few states that allow for the formation of a NPLLC. See TCA §48-101-801, et. al. So, what is a NPLLC? And how is it different than a Nonprofit Corporation?
A Tennessee NPLLC has to be owned by a single Nonprofit Corporation. Therefore, if you, as an individual or a group of people, form a nonprofit entity it cannot be a NPLLC. Individuals cannot form a NPLLC. Only a Nonprofit Corporation can form a NPLLC. The NPLLC is a single member limited liability company, and its sole member must be a Nonprofit Corporation (or an unincorporated Church).
A single member limited liability company is disregarded by the Internal Revenue Services for federal income tax purposes, which is why TCA §48-101-805(1) states that a NPLLC must be “disregarded as an entity for federal income tax purposes.” Under Tennessee law, the NPLLC must also be exempt from the Tennessee franchise and excise tax as not-for-profit, as defined in TCA §67-4-2004. This means that the NPLLC’s single member must be either a Nonprofit Corporation or an unincorporated Church (“Church”).
At the federal level, the IRS disregards single member limited liability companies, seeing it as one and the same as the single member (the Nonprofit Corporation or Church). As such, the IRS has provided guidance that donations to a domestic NPLLC are treated as charitable contributions to the single member parent Nonprofit Corporation or Church. IRS Notice 2012-52, 2012-35 I.R.B. 317). So, a charitable donation to a NPLLC is treated as a charitable contribution to the Nonprofit Corporation or Church. The Nonprofit Corporation or Church would provide a written acknowledgement to the donor of the contribution to the NPLLC as well as any required disclosures. Additionally, the NPLLC is not required to file a separate 501(c)(3) application (because the parent Nonprofit Corporation or Church is already exempt). The NPLLC will report its operations on the parent’s annual Form 990. Since a Church is exemption from filing a Form 990, there would be no required reporting for a NPLLC owned by a Church.
There are reasons for a Nonprofit Corporation to create a NPLLC, and there are other issues to be considered in the formation of NPLLCs, such as sales tax exemption, property tax exemption, operations and activity by the NPLLC outside of Tennessee (just to name a few), but these topics are for a different post and deeper discussion. The important aspect to remember is that a Nonprofit Corporation and a Nonprofit Limited Liability Company are very different types of entities, and an individual or group of people wanting to start a charitable, religious, or educational tax-exempt organization, that wants to be recognized as a 501(c)(3) by the IRS, should not file a NPLLC.