Keep in mind as you read the native and linked-to content on this page that a nonprofit and tax-exempt entity are not synonymous.
National Advocacy on Serious Neurobehavioral Illness, A Nonprofit LLC is a standalone nonprofit LLC. This page provides important information about this entity type and the current policy of the IRS.
Most nonprofits are incorporated and governed by boards of directors. Directors of incorporated entities serve an important function in the governance of corporations and have well-defined responsibilities.
Basic Duties and Role of Board of Directors for Nonprofits (thebalancesmb.com)
Nonprofit corporations are a distinct type of incorporated entity among corporations. Most nonprofits incorporate for reasons of eligibility for IRS tax exemption and liability concerns. A corporation is separate from the individuals who manage or organize it, which relates to liability matters. The nonprofit corporation also continues to exist beyond the lifetime or involvement of the people who began it or who have managed it. Another reason relates to IRS Requirements. Naturally, a charitable organization will not want to have revenues in the form or donations and grants dedicated to the benefit of the public good to be subjected to taxation. Nonprofits also need to have 501c3 status so that donations are tax exempt to donors. In order to seek exemption from the IRS, nonprofit organizations must meet IRS requirements:
To be organized exclusively for a charitable purpose, the organization must be a corporation (or unincorporated association), community chest, fund, or foundation. Essentially, the IRS dictates the organizational structure and governance for exempt nonprofits.
An LLC is owned by its members, and while there is such a thing as a “nonprofit LLC”, the IRS dictates that all nonprofit LLC members must be 501c3 (tax exempt) organizations. That means that the LLC is a subsidiary of a 501c3 entity or “owned” by a 501c3 entity.
Why A Nonprofit LLC?
The founder of NASNIcares (the “dba” name for National Advocacy on Serious Neurobehavioral Illness, a Nonprofit LLC) strongly disagrees with these policies but supports the underlying principles pertaining to the ethics of nonprofit governance and compensation.
These are links to what can be called ‘white papers’ on the topic of the IRS and Nonprofit LLCs:
A Consideration of an LLC for a 501(c) (3) Nonprofit Organization
Papa ‘s Brand New Bag: The Need for IRS Recognition of an Independent Nonprofit Limited Liability Company (NLLC)
A founder of a nonprofit initiative may set out on a well-defined mission with a keen focus on effecting change to the good of society. Once the organization incorporates, the founder does not own the entity. It can be said that the public “owns” an incorporated nonprofit entity. The possibility exists that the founder’s original mission can be subverted, succumb to mission creep, or discharge the founder from the entity’s affairs altogether. This is a real risk especially when the central cause is subject to fractiousness, ideological controversies, and intrusive forces of many kinds. In fact, many advocates lament that perhaps the most well-known nonprofit that was originally founded to focus on serious “mental illness” succumbed to mission creep to the point that it would be more fitting to define that organization’s mission as advocating for Mental Health rather than serious cerebral Illness.
Even among advocates who are striving against the conflation of Mental Health and “Mental Illness”, there is a lack of clarity in vision for the type of unified action that is needed to affect change. The founder of NASNIcares has a very clear vision and some strong sentiments about the IRS’ dictates on organizational form and governance.
There is a question of the IRS’ rationale for imposing an incorporation model that, to fledgling nonprofit startups can be onerous – and to others a potent risk factor for mission derailment. The IRS’ policies have also given rise to the proliferation of fiscal sponsorship. Fiscal sponsorship is promoted as a solution for nonprofit startups facing the challenges of dealing with these policies. Many founders have had to engage fiscal sponsors due to the obstacles encountered in getting a nonprofit entity off the ground.
Fiscal sponsorship can be very beneficial as an alternative to creating a legal nonprofit entity. However, it should not have to be a recourse to a founder that would otherwise form an independent legal entity if not for onerous policies imposed by the IRS.
Link to white paper on fiscal sponsorship
NASNIcares was formed as a sole-member LLC for reasons of mission control and lean fiscal governance. Some states, including PA permit a sole-director nonprofit corporation. NASNIcares has strict internally imposed controls that enforce constraints on member compensation – if at some time in the future, the founder elects to take compensation. NASNIcares complies with PA state laws such that there can be no distribution of assets/revenues to members or any other individuals; and upon dissolution, all net assets shall be transferred to a 501c3 entity (that must be aligned to the goals of NASNIcares).
Currently only a few states permit the formation of standalone nonprofit LLCs and as of 2017, when ACT 170 of 2016 took effect, the State of Pennsylvania, with an eye toward modernizing its business laws, joined that very short list.
You must contribute to a qualified tax-exempt organization (501c3) for donations to be tax deductible.