There are multiple ways to launch a new business. The most common forms are limited liability companies (LLCs) and corporations, typically designed by Inc. Both entity types have specific tax implications. If you’re launching a for-profit business, you need to know the differences and make the best choice for your new business. However, if you’re starting a nonprofit organization, your best option is forming a nonprofit corporation.
Nonprofits are public institutions governed by a board of directors. No one individual owns or directs a nonprofit. As such, the IRS requires 501(c)(3) tax-exempt organizations to be formed as nonprofit corporations. This ensures the board oversees all activities and is accountable for the organization’s actions.
Conversely, an LLC is a private company that can be owned by a single individual (or a group of members) who receives the entity’s profits. This person or persons can make all of the decisions and, so long as they are legal and in line with tax requirements, are not accountable to anyone.
With a basic explanation of an LLC and a nonprofit corporation, let’s explore some reasons you might want to convert from an LLC to a nonprofit company.
Why would you want to convert an LLC to a nonprofit?
- Many people intend to start a nonprofit organization but mistakenly register an LLC.
- Sometimes, a business operates as a for-profit LLC for some time before deciding its mission is better suited as a nonprofit.
In the examples above, the first is the most common. Because starting a new LLC is incredibly easy in most states, people often file the paperwork without realizing the nonprofit requirements. Thankfully, registering as an LLC is not the end of the world. Let’s look at some of the options.
Option 1: Convert the for-profit LLC to a nonprofit corporation
Some states do allow a for-profit to nonprofit conversion. It’s rare but permissible in certain parts of the country. The process usually involves filing paperwork with the state explaining why you wish to convert, explaining the process the LLC owners (members) took to approve and initiate the conversion, and ensuring any outstanding tax burden is remedied.
In these states, the process may look something like this:
- The LLC’s owner decides to convert the company to a nonprofit organization.
- All final debts are paid according to the LLC’s operating agreement.
- Outstanding tax burdens are paid to the Department of Revenue.
- Conversion documents are filed with the Department of State.
- 501c3 tax-exempt status is applied for with the IRS, indicating that the organization was formerly a for-profit entity.
- Charity registration is filed with the Attorney General.
Option 2: Dissolve the LLC and start a new nonprofit organization
Most states do not permit converting a for-profit company to a nonprofit corporation. In these situations, “converting” involves dissolving the LLC and starting a new nonprofit corporation. In states that do permit converting, this process can sometimes be quicker and may be a better option.
The most common question in these situations is, “what happens to my company’s name if I can’t convert?”
In many cases, you can still use the name since most states permit names of dissolved business entities to be reused. States have different processes for how this works, but in a typical situation, this is the process:
- The LLC’s owner decides to convert the company to a nonprofit organization.
- All final debts are paid according to the LLC’s operating agreement.
- Outstanding tax burdens are paid to the Department of Revenue.
- Dissolution documents are filed with the Department of State.
- Articles of Incorporation are filed with the Department of State.
- 501c3 tax-exempt status is applied for with the IRS.
- Charity registration is filed with the Attorney General.
Things to consider when converting from an LLC to a nonprofit corporation:
- Does your state allow for a conversion? If so, what’s the process, time, and cost?
- Does the LLC have assets? Would you want to donate those to the nonprofit?
- Did the LLC Members (owners) vote to dissolve the LLC and convert to a nonprofit organization, and is that vote recorded in the meeting minutes?
- Are you already a 501(c)(3) or looking to become one?
- Would you still operate an LLC/for-profit company if you created a nonprofit? For example, keep the LLC active for other business use, or is the intention merely to convert as the mission has changed and you desire to keep the name?
- Will there be a tax burden for the LLC and how does this impact the future Nonprofit?
The answers to these questions help determine the best path to take when attempting to convert from a for-profit LLC to a nonprofit corporation.
With few exceptions, BryteBridge does not generally advise converting an LLC to a Nonprofit because it can be complicated and cause unintended tax implications. If your organization insists on a conversion, due to the potential tax implication, we suggest the help of a CPA or accountant who has experience in such matters.
How long does it take to convert an LLC to a nonprofit organization?
Without accounting for the state’s filing times which vary across the country, the process described above should take about 10-15 business days. Don’t hesitate to contact BryteBridge’s nonprofit experts today to get started on converting your organization. Be sure to check out our awesome reviews as well!
