Nonprofit Tax Update: Standards for Limited Liability Companies for 501(c)(3) Status

On October 21, 2021, the Internal Revenue Service published IRS Notice 2021-56, establishing current standards that a limited liability company (LLC) must satisfy to receive its tax-exemption as a Section 501(c)(3) organization.  The IRS is requesting public comments on these standards as well as specific issues relating to LLC’s and tax-exempt status in determining whether additional guidance is needed.  The Notice does not affect the tax-exempt status of any current Section 501 (c)(3) organizations.

Summary of the Standards

1. Submit Form 1023 Application for Recognition of Exemption under 501(c)(3)
2. Required Provisions in both the LLC’s Articles of Organization and Operating Agreements
   A. Each member of the LLC must be either
   i. A Section 501(c)(3) organization; OR
   ii. A Governmental unit described in Section 170(c)(1), including a wholly-owned instrumentality of the governmental unit
   B. Express charitable purposes or charitable dissolution provisions
   C. If the LLC is a private foundation, it must express compliance with the Chapter 42 excise taxes for private foundation
   D. An acceptable contingency plan in the event that one or more LLC members cease to be a section 501(c)(3) organization or governmental unit
3. The LLC must represent that all provisions in its Articles of Organization and Operating Agreement are consistent with the applicable state law and are enforceable
4. If the LLC is formed under a state law that prohibits adding the Required Provisions listed in #2 above to its Articles of Organization, the Required Provisions will be satisfied if the LLC’s Operating Agreement and Articles of Organization do not include any inconsistent provisions.

Follow this link to Notice 2021-56.  Some of the IRS public comment requests located in Section 4 of the Notice relate to the inconsistencies of Required Provisions and certain states LLC statute.  These inconsistencies will need to be resolved.  Comments may be submitted by February 6, 2022.  If you have questions, please contact VonLehman nonprofit tax specialist, Bryan Pautsch, at bpautsch@vlcpa.com or 800.887.0437.