I am starting a church and filed with the state as a limited liability company. I also selected LLC when obtaining my Employer Identification Number. During that process, I had the option to select "church," so I did. Now someone has told me that I should have set up a nonprofit corporation to be tax-exempt. I assumed that the IRS views entities that qualify as churches as nonprofits automatically. Is there a difference being an LLC that I should be concerned about? Do I need to change to a nonprofit corporation?
This question illustrates the confusion in the language of the nonprofit field. (See Ready Reference Page: “What Do We Mean When We Say ‘Nonprofit’?”) Limited liability companies and nonprofit corporations are different types of entities at the state law level. They become “nonprofit” by virtue of the language in their state governing documents, but “nonprofit” is not a federal tax status.
Tax-exemption as a church requires that the entity qualify as a “charity” under Section 501(c)(3) of the Tax Code, a federal tax status that is available to corporations, LLCs, unincorporated associations and trusts. The key to charitable (church) tax-exemption is having the “magic language” the IRS expects in the governing documents of the organization, stating that the organization will act exclusively for charitable or religious purposes and a few other clauses. (See Ready Reference Page: “Articles of Incorporation Establish Basic Form of Nonprofit Corporations”)
Although an LLC is probably not the most common form of church entity, an LLC can obtain exemption as a church and you don’t need to change the form of your organization to be a nonprofit corporation. You also don’t need to file for specific recognition of exemption as a church. But you should be sure that your governing documents include all of the required magic language and that you provide the expected activities if the IRS ever comes looking. You can get more specific information from IRS Publication 557 on what the IRS would be looking for.
Comments
An LLC structure for a church is a poor choice. Unless something changed recently, I'm under the impression that the IRS still uses a 12-part test to determine 501(c)(3) eligibility for LLC. One of those tests is the requirement that all members of the applicant LLC be existing 501(c)(3) organizations, not persons. While the IRS often approves LLC structures as wholly-owned subsidiaries and disregarded entities under a 501(c)(3), they should not be used, in most circumstances, as the primary entity type.
Totally agree with Greg on this one. The IRS still uses a 12 part test for LLC. Normally the church would be the tax-exempt entity and they would use a single-member LLC to hold any revenue that be subject to tax or any activity that might jeopardize their tax-exempt status.
In California, there are no "nonprofit" LLCs (with only one highly technical exception that does not apply to churches). There is no good reason for a church to organize as anything other than a corporation. Some think filing a Fictitious Name Statement gives them the same status as being incorporated . . . which is a grave error.
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