Can the members of a for-profit limited liability company be the sole contributors to a charitable nonprofit corporation that provides scholarships for free medical services, where the services are provided by the LLC? The LLC’s members comprise the majority of the nonprofit corporation’s Board of Directors. The for-profit LLC provides those services at no cost to the children or the nonprofit. There is no outside funding. We are in the process of filing Form 1023-EZ for 501(c)(3) exemption. Will we pass the public support test to qualify as a public charity?
Fortunately (perhaps) for the applicants and unfortunately (probably) for the public, the IRS will grant exemption as a 501(c)(3) public charity for practically any group that applies on the 1023-EZ. Your purpose is certainly charitable, and if the LLC is providing all of the services free, there is no private inurement. You have no obvious disqualifying feature that would be revealed on the eligibility worksheet you are required to read and answer before you file. You are supposed to figure out and specify, however, whether you qualify as a public charity or as a private foundation.
If you never bring in more than $50,000 a year and never have to file a tax information return other than the 990-N postcard, which contains no financial information, you aren’t likely to be questioned on your public charity status. If you get more than $50,000 and have to file a Form 990-EZ or full Form 990, however, you will have to figure your public support percentage on Schedule A when you file your annual return.
If all of the contributions come from the LLC and it is treated as a single donor, you would be classified as a private foundation. If the individual members of the LLC give in their individual capacities, you could qualify as publicly supported under the “donative test” if the total of their contributions that are treated as public support exceeds 33 1/3% of your support. But any individual’s contribution counts as public support only up to 2% of the total support, so you will need at least 17 separate donors to reach the 33 1/3% safe harbor cut-off.
If you have less than that, you are not likely to qualify under the “facts and circumstances test” because you don’t have a broader charitable solicitation campaign. (You can see how the calculation works in detail in our Ready Reference Page: “Calculating Public Support”) If you think you can raise enough public money, perhaps with a small annual solicitation campaign, go for it. If you know you won’t qualify, I wouldn’t recommend you file the EZ and falsely represent that you will. It is not the end of the world if you operate as a private foundation, but it is better to be a public charity.