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How LLCs Can be Recognized as Tax-Exempt Organizations

On October 21, 2021, the IRS released an advance version of Notice 2021-56 that sets forth standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under section 501(a) and described in section 501(c)(3).

Notice 2021-56 notes that the IRS will issue a determination letter recognizing an LLC as described in section 501(c)(3) only if both the LLC’s articles of organization and its operating agreement include:

  • Provisions requiring that each member of the LLC be either
    • an organization described in section 501(c)(3) and exempt from taxation under section 501(a); or
    • a governmental unit described in section 170(c)(1) (or wholly-owned instrumentality of such a governmental unit).
  • Express charitable purposes and charitable dissolution provisions in compliance with existing regulations under section 501(c)(3)
  • The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private foundation
  • An acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its section 501(c)(3) status) in the event that one or more members cease to be section 501(c)(3) organizations or governmental units (or wholly owned instrumentalities thereof)

Background

Regulations surrounding exempt organizations were issued well before any states enacted the first LLC statute. As a result, the regulations don’t specifically address LLCs.

Historically, IRS standards applied in issuing determination letters to LLCs generally required LLC members be 501(c)(3) organizations, governmental units, or wholly owned instrumentalities of a state or political subdivision of a state.

State Laws

If an LLC is formed under a state LLC law that prohibits the addition of provisions to articles of organization other than certain specific provisions required by the state LLC law, the above requirements will be deemed satisfied if the LLC’s operating agreement includes the provisions described above and if the articles of organization and operating agreement do not include any inconsistent provisions.

The notice also provides that the LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable.

In addition, to assist the U.S. Treasury Department and the IRS in determining whether additional guidance is needed, the notice requests public comments on this notice, as well as specific issues relating to tax-exempt status for LLCs.

This notice does not affect the status of organizations currently recognized as described in section 501(c)(3).

For more information or to see how Windes can assist, please get in touch with Shalini Saidha at ssaidha@windes.com or
844.4WINDES (844.494.6337).

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