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Written by : Harvey Mckneely |
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hey y'all it's tiffany with boss in the budget i help new and small nonprofits get up and running so if you need help with your nonprofit or if you need help raising money for your new non-profit make sure you subscribe to this channel because i drop videos all the time i really wanted to do this video because there's a lot of confusion around the startup process in general especially when it comes to locs it's like llcs are like a buzzword or something in the startup space and a lot of people assume that like that's the first step for starting any kind of business and so i want to just kind of clear this up when it comes to nonprofits first things first you're going to hear me say this a lot in this video but i'm going to make sure i get it out the way immediately if you are asking questions about your llc and how to turn into a non-profit you really need to speak to an attorney or a paid professional like an accountant right or a consultant who can walk you through this information based on your individual circumstances when it comes to setting up business entities it's very specific to the state you set it up in and it's also very specific to what your needs are and so you may be listening to a general youtube video and i understand that you have a certain situation that you need to consider in everything you're trying to decide for the direction of your non-profit so i'm just going to say this this is not going to be the only time you're going to hear this but it'll be the first time you need to speak with an attorney this is just general advice i'm going to give you general information to help guide you through that conversation once you talk to somebody so you understand the things to consider and what to be mindful of but please talk to somebody if you're confused about your llc and turning it into a non-profit now in this video when i'm talking about nonprofits i mean a non-profit that's seeking 501c3 status now the reason why i'm doing this video is because i get this question a lot when i talk to people on the phone a lot of people will be really gung-ho about starting a business so they'll start in a business and create an llc thinking that that's the first step and then they can get 501c3 status this is what i want you to keep in mind though generally if you are an llc you are not able to get 501 c 3 status but i'm going to slow up this because there are so many caveats around this and i want to make sure you get it okay so there is actually a process where llc's can get 501 c 3 status there is a process in place but it's a convoluted process and the members of the llc have to also be 501 c 3s it's a really layered process it's complicated and more than likely it does not fit your particular situation if you're just one person who thought you needed to do an llc first so let me just put that out there right so if you do look up this information you're gonna see that llc's can possibly apply for 501c3 status but it's under certain circumstances that usually don't apply to you so when you're just a person wanting to start a non-profit because you have a passion and a vision you need to be setting up a corporation in your state a nonprofit corporation now this is again why you need to speak to a lawyer who understands your specific situation because there are different types of business entities that you can set up in order to get 501 c 3 status you could possibly be an association you could possibly be a trust depending on what you want to do generally if you're doing direct services and you're serving the public generally you're going to be set up as a non-profit corporation right and usually when i talk people through the startup process that's the assumption that you are a non-profit corporation so i broke some of this down in a video that i did called what are the articles of incorporation i'm linking that above and i'm also providing it in the description box so you can easily find it so you can understand like the process of incorporating right now i'm going to walk through a little bit more of this but i also want you to stay to the end because if you're in the position where you've already created your llc and you're like oh snap i didn't realize i shouldn't have done that what do i do now i'm going to share at the end of this video what you should do next okay so let's finish up our conversation talking about llc in terms of being a non-profit and getting 501c3 status when you're setting this up at the state level be sure that you're actually setting up a non-profit corporation because there are for-profit corporations and they have different names from state to state and my home state is called a stock corporation or non-stock corporation now when i set up my very first non-profit when i was a grad student way back in the early 2000s i had no idea what that meant i had never heard of the word non-stock i had no clue right and so if you don't know the language in your state and you don't do the work to figure out like the differences between the two you can make some mistakes right and you don't want to do that in this process it's very important that how you set up your your nonprofit what you put on your application to the irs is correct because one thing like one mistake can take you down a really costly road so i did a video called the number one mistake that people make applying for taxes and status because i try to lift up these things for people because if you can't afford for people to do this for you you just need to know what to look out for so i'm linking that video above and also i just want to mention my non-profit startup master class and i recorded a master class for over two hours where i talked through like how to set up your nonprofit the strategy behind it but also like the logistics and what to do and what language you need to make sure you have in your articles of incorporation and how to make sure you fill out the applications and make sure you check this box and not check this box down to that level so if you're interested in that if you need help like that then make sure you check out the non-profit startup masterclass so if you're still watching this video you might be one of those people who set up your llc thinking you can get 501c3 status and you may be saying to yourself now what am i supposed to do now this process really does depend on the state so i'm going to walk you through some alternatives or some options but they may not be an option for you depending on your state so some sometimes your state will allow you to kind of change the business structure they may have a form where you can change it right where you can transfer things or you can switch things over especially if you're a new non-profit or if it's less than a year that you got started right so you need to contact the secretary of state's office and see if there's some kind of form you can use to transfer or change the entity type easily the other option is for you to completely dissolve the llc and just start over start from scratch just create your non-profit corporation like you were supposed to in the first place an
Thanks for your comment Mozelle Vanderwood, have a nice day.
- Harvey Mckneely, Staff Member
hi Lee Phillips here again I want to talk about using an LLC as a nonprofit organization people get the idea that they're gonna have a non-profit well you're probably not going to use an LLC as a nonprofit organization the primary reason is the LLC that's the nonprofit has to be solely owned by another entity which in and of itself is a nonprofit and you're not a non-profit now you can set up a nonprofit corporation and have it be owned by individuals who are not nonprofit in and of themselves but the LLC is different it has to be owned only by a member the owner that is in and of itself a non-profit and it has to meet the limited liability companies is exempt organization update from the IRS and there are a dozen things that you have to follow in order to have your LLC qualify as a non-profit the organizational papers the papers that you file to set up the LLC as a non-profit have to specifically state that the only activities that the LLC can do are in fact related to the nonprofit function of the LLC and that's going to be education it's going to be servicing somebody there are a number of criteria that the IRS has things that they consider to be nonprofit type activities the LLC has to be operated exclusively to further the charitable purposes of that thing and this all has to be written down in the organizational papers themselves the organizational language has to require that the LLC members be a non-profit a 501 C 3 or some such organization a government organization which is nonprofit and you're not a government organization that's nonprofit it's got to prohibit any direct transfer of the assets of the LLC to something or somebody other than a non-profit it's got to guarantee that upon dissolution of the LLC all of the assets of the LLC go to nonprofits it's got to require that any amendments to the LLC are consistent with the 501c3 requirements it's got to prohibit the LLC from merging with anything or anybody that's not in and of itself a non-profit so all of these things the language has got to contain an acceptable contingency plan acceptable to the IRS a contingency plan that in the event one of the owners suddenly becomes a non non non profit does not qualify as a non-profit then what happens the provisions must be consistent with all of the state laws governing nonprofits the bottom line is the LLC is not the entity the legal structure that you want for a nonprofit organization that's going to be your corporation and corporations do have advantages over LLC's and this is one of those advantages the corporation has over an LLC the LLC is just too restrictive for most people most organizations to consider as the legal structure for a spin-off nonprofit or the original formation of a non-profit of any type this is Lee Phillips talking about using LLC's for nonprofit organizations
Thanks Glenn your participation is very much appreciated
- Harvey Mckneely
About the author
I've studied synthetic chemistry at Bethany Lutheran College in Mankato and I am an expert in fashion design. I usually feel crazy. My previous job was diver I held this position for 11 years, I love talking about kite flying and drumming. Huge fan of Sia I practice ultimate frisbee and collect swarovski figurines.
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