TP organized as non-profit LLC, filed SS4 and obtained EIN. TP checked non-profit on SS4, but does plan to request determination letter. Does TP file 1120?

Best
Bill

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On Tuesday, August 9, 2022 at 7:22:03 PM UTC-4, Bill Lentz wrote:

TP organized as non-profit LLC, filed SS4 and obtained EIN. TP checked non-profit on SS4, but does plan to request determination letter. Does TP file 1120?

Best
Bill

Filing should revert back to default status. If it's a SMLLC it's a Schedule C, a MMLLC files Form 1065. Of course, either form of LLC can elect tax treatment as a corporation.

Ira Smilovitz, EA
Leonia, NJ

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According to Bill Lentz <[email protected]>:

TP organized as non-profit LLC

There is no such thing as a non-profit LLC. You can be an LLC, or you
can be a not-for-profit corporation, but you have to be one or the
other. I have set up both, and they are different.

See https://www.irs.gov/charities-non-profits/charitable-organizations/organizational-test-internal-revenue-code-section-501c3

I would suggest the taxpayer close down the LLC, set up the not-for-profit corporation he should have set up in the first place, and most importantly
get competent tax advice so he does it correctly.

One sort-of exception is that if you have an LLC where the member or
member are existings not-for-profit corporation, the LLC can inherit
the parents' tax exemption (I've been involved in that too), but it
doesn't sound like that's the situation here.

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On 8/9/2022 9:09 PM, John Levine wrote:

According to Bill Lentz <[email protected]>:

TP organized as non-profit LLC

There is no such thing as a non-profit LLC. You can be an LLC, or you
can be a not-for-profit corporation, but you have to be one or the
other. I have set up both, and they are different.

See https://www.irs.gov/charities-non-profits/charitable-organizations/organizational-test-internal-revenue-code-section-501c3

I would suggest the taxpayer close down the LLC, set up the not-for-profit corporation he should have set up in the first place, and most importantly get competent tax advice so he does it correctly.

One sort-of exception is that if you have an LLC where the member or
member are existings not-for-profit corporation, the LLC can inherit
the parents' tax exemption (I've been involved in that too), but it
doesn't sound like that's the situation here.

Not so fast:

https://www.findlaw.com/smallbusiness/starting-a-business/can-an-llc-be-a-nonprofit-.html


https://www.upcounsel.com/can-a-non-profit-be-an-llc

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Bill Lentz <[email protected]> wrote:

TP organized as non-profit LLC, filed SS4 and obtained EIN. TP
checked non-profit on SS4, but does plan to request determination
letter. Does TP file 1120?

When a corporation or trust is set up as a nonprofit, it files IRS Form
990 and/or 990-T, even if it hasn't applied for or gotten IRS approval.
On the other hand John is right, for the most part, unless allowed by
state law, an LLC can't be a nonprofit.

So if you didn't file IRS Form 8832, you don't file Form 1120.


--
Stu
http://DownToEarthLawyer.com

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According to Taxed and Spent <[email protected]>:

One sort-of exception is that if you have an LLC where the member or
members are existings not-for-profit corporation, the LLC can inherit
the parents' tax exemption (I've been involved in that too), but it
doesn't sound like that's the situation here.

Not so fast:

https://www.findlaw.com/smallbusiness/starting-a-business/can-an-llc-be-a-nonprofit-.html
https://www.upcounsel.com/can-a-non-profit-be-an-llc

If you read those articles, you will find that they describe exactly the sort-of exception whose description you quoted in your reply.

I don't see how it could work otherwise. Every LLC is owned by one or more members,
but one of the rules for a charity is that it can't be owned by anyone. So the only
way for that to happen is for the member owner(s) in turn to be unowned.

I have done this and really, setting up a not-for-profit corp and getting a tax exemption is straightforward. The LLC subsidiary of another non-profit is exotic and the one I was involved with involved expensive lawyers being sure
it was set up correctly.

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According to Stuart O. Bronstein <[email protected]>:

When a corporation or trust is set up as a nonprofit, it files IRS Form
990 and/or 990-T, even if it hasn't applied for or gotten IRS approval.

Or 990-EZ or 990-N if it's small enough.

On the other hand John is right, for the most part, unless allowed by
state law, an LLC can't be a nonprofit.

Even if state law allows, the IRS won't recognize an LLC as a nonprofit unless all the members are nonprofits which limits this to niches. I could imagine
an LLC providing services to its non-profit members but even that is likely easier to do as a non-profit corp supporting organization.

Setting up non-profit corporations is very easy and usually cheaper
than an LLC. Here in NY you file a three page boilerplate certificate
of incorporation and pay $75. (You can pay extra if you want faster
service, from $25 for 24 hrs to $150 for 2 hours.) Later there's a one
time form you file with the state tax department to confirm that you
won't be paying taxes, and that's it. No publication requirements, no
biennial fee, none of that LLC stuff.
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Taxed and Spent <[email protected]> wrote:

On 8/9/2022 9:09 PM, John Levine wrote:

According to Bill Lentz <[email protected]>:

TP organized as non-profit LLC

There is no such thing as a non-profit LLC. You can be an LLC, or you
can be a not-for-profit corporation, but you have to be one or the
other. I have set up both, and they are different.

See >>https://www.irs.gov/charities-non-profits/charitable-organizations/organizational-test-internal-revenue-code-section-501c3

I would suggest the taxpayer close down the LLC, set up the not-for-profit >>corporation he should have set up in the first place, and most importantly >>get competent tax advice so he does it correctly.

One sort-of exception is that if you have an LLC where the member or
member are existings not-for-profit corporation, the LLC can inherit
the parents' tax exemption (I've been involved in that too), but it
doesn't sound like that's the situation here.

Not so fast:

https://www.findlaw.com/smallbusiness/starting-a-business/can-an-llc-be-a-nonprofit-.html

You didn't read it.

A nonprofit LLC can also qualify for tax-exempt status in three
situations:

A single member owns the LLC, which is itself a 501(c)(3) organization
Two or more members, which are 501(c)(3) organizations, own the LLC
The LLC gets recognition as a tax-exempt entity by filing
Form 1023 with the IRS

If under state law an individual or business corporation is allowed to
be a member of a nonprofit LLC, I just don't see how it would be
determined to be an exempt organization under federal tax law.

Now, mutuals and life insurance associations are examples of exempt organizations with their own subsection under 501, the benefits of which
inure to members, which is not allowed with a charity. You wouldn't set
those up as nonprofit LLCs under state law.

https://www.upcounsel.com/can-a-non-profit-be-an-llc

The two articles are similar.

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"Adam H. Kerman" <[email protected]> wrote:

If under state law an individual or business corporation is
allowed to be a member of a nonprofit LLC, I just don't see how it
would be determined to be an exempt organization under federal tax
law.

Individuals can be members of nonprofits too. For an LLC to be a
nonprofit state law would prohibit the members from having any rights
other than to select the managers. The Articles of Organization and
Operating Agreement would also have to be consistent with being a
nonprofit. I don't know for certain if any states have done that, but
I have a vague recollection of hearing about one state that provided
that possibility.

--
Stu
http://DownToEarthLawyer.com

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Stuart O. Bronstein <[email protected]> wrote:

"Adam H. Kerman" <[email protected]> wrote:

If under state law an individual or business corporation is
allowed to be a member of a nonprofit LLC, I just don't see how it
would be determined to be an exempt organization under federal tax
law.

Individuals can be members of nonprofits too.

You know, you removed the context by failing to retain the quote. You
changed the meaning. Please don't do that.

The quote from the article was specific to 501(c)(3). Yes, they can have members but under federal tax law, the members must not own the entity.
Assets must not be transferred to members.

Let's say I'm a long-time member of an art museum. I'm a big-money
donor. I decide that I want to repurpose the monies I've given over the
years. I can't just say, I quit my membership, then grab a valuable
painting off the wall as my share. I can't take my equity out. Owners
equity isn't a bookkeeping concept in this type of entity.

In the next paragraph, I mentioned two examples of entities that can
receive recognition under 501 in which the members do have ownership --
life insurance 501(c)(12) and mutual financial organizations 501(c)(14)
-- but doubted it would be desireable to set up either one as a
nonprofit LLC under state law even if it were allowed.

Getting back to a hypothetical 501(c)(3) set up as an LLC:

For an LLC to be a nonprofit state law would prohibit the members from
having any rights other than to select the managers.

It's more than not having rights. In LLC law, "member" is simply the
term used in lieu of "shareholder" or "partner", but a "member" is one
of the owners.

If the state had a nonprofit LLC law, and the members of the LLC were individuals and businesses, then the law would have to allow its
organizing documents to state that the members are not owners.

If an LLC's membership comprises individuals and businesses that are
not owners, how could it possibly be an LLC owned by no one at all?

The Articles of Organization and
Operating Agreement would also have to be consistent with being a
nonprofit. I don't know for certain if any states have done that, but
I have a vague recollection of hearing about one state that provided
that possibility.

With members as individuals and businesses? I'd love to read the
statutory language and see how it could be made to work together with
federal tax law.

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It appears that Stuart O. Bronstein <[email protected]> said:

"Adam H. Kerman" <[email protected]> wrote:

If under state law an individual or business corporation is
allowed to be a member of a nonprofit LLC, I just don't see how it
would be determined to be an exempt organization under federal tax
law.

Individuals can be members of nonprofits too. For an LLC to be a
nonprofit state law would prohibit the members from having any rights
other than to select the managers. The Articles of Organization and >Operating Agreement would also have to be consistent with being a
nonprofit. I don't know for certain if any states have done that, but
I have a vague recollection of hearing about one state that provided
that possibility.

Those articles made it clear that the IRS is not going to approve an
LLC as a charity if its members are not all non-profits. One of them
links to an IRS memo that says as much.

As I said in another message, other than in a few arcane situations a non-profit LLC makes no sense. It is easier and cheaper to set up
a normal not-for-profit corporation.

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John Levine, [email protected], Primary Perpetrator of "The Internet for Dummies",
Please consider the environment before reading this e-mail. https://jl.ly

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