Can I set up my Nonprofit as an LLC?
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 two parts:
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.
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 Corporation.