Question? Can I setup my Nonprofit as an LLC?
Answer: Yes, but only under very limited circumstances would this be of benefit.
In order to understand why, let’s break the one question into its
1. Can I form a Nonprofit LLC in Texas?
The Texas Business Organizations Code (BOC) does not recognize the term
“nonprofit LLC” as describing a specific type of entity, but
the BOC does allow for the formation of an LLC with a nonprofit purpose.
Although a for-profit corporation is prohibited from “operating
a nonprofit institution” (BOC §2.008), the BOC does not impose
this prohibition on LLCs. This is one of the few substantive changes introduced
by the BOC. As of this writing, California, Tennessee, Michigan and Minnesota
also permit Nonprofit LLCs.
2. Will an LLC with a nonprofit purpose be tax-exempt?
A Texas LLC that states a nonprofit purpose is not automatically exempt
from state or federal taxes. In fact, the IRS will not give a nonprofit
LLC tax-exempt status unless all its members are themselves tax-exempt
organizations. For example, a group of charitable organizations could
form a trade group as an LLC and then be granted tax-exempt status.
So, while technically you can form a Nonprofit LLC, as a practical matter,
the LLC simply won’t be accorded tax-exempt status by the IRS in
enough situations to make it a viable alternative to a Texas Nonprofit