Can a Nonprofit Own an LLC or a For-Profit Company?

Yes. A nonprofit can own an LLC, and it can own a for profit company outright. What it cannot do is use either to change what the IRS treats as its own income. A single member LLC owned by a charity is ignored for federal tax purposes: its activities are the charity’s, reported on the charity’s Form 990. A for profit subsidiary is a separate taxpayer that pays its own corporate tax. Which one fits depends on whether you want a liability shield, a tax wall, or both.

It is less common than the formation company guides suggest. From the IRS’s own figures, only 1.0% of charities spending $250,000 to $1m report owning a single member LLC or another disregarded entity. It is a tool larger organizations use: 9.4% of those spending $5m to $25m, and 23.0% of those over $25m.

The three structures

A single member LLC. When a charity is the only member of an LLC that has not elected to be taxed as a corporation, the LLC is disregarded for federal tax purposes: its operations and finances are treated as the charity’s own for tax and information reporting. That is the point and the limit of it. The LLC can hold a risky asset, a building, a camp, a separately run programme, so that a claim against that activity reaches the LLC’s assets and not the whole charity’s, under state law. It does nothing for tax. If the activity is an unrelated business, the charity owes unrelated business income tax on it exactly as if the LLC did not exist.

A taxable subsidiary. When a charity has a business large enough that its income threatens the charity’s exemption, or simply wants it kept apart, the usual answer is a corporation the charity owns, which pays corporate tax on its profits. Dividends it pays up to the charity are generally excluded from the charity’s unrelated business income. But a rule written for exactly this arrangement catches the common workaround: if the charity controls the subsidiary, meaning it owns more than 50%, then interest, rent and royalties the subsidiary pays the charity are unrelated business income to the charity, to the extent they reduce the subsidiary’s own taxable income, under 26 U.S.C. 512(b)(13). Charging the subsidiary rent to move profit into the charity tax free does not work.

An LLC with other owners. A charity that shares an LLC with other members, a for profit partner or another nonprofit, is in a partnership for tax purposes. Its share of unrelated income is taxable, and if the venture’s activities are central to the charity’s purpose, the arrangement has to keep the charity in control of how the venture serves that purpose. This is the structure that most needs a lawyer.

How many charities do it

The Form 990 asks three questions about exactly this, in Part IV: whether the organization owned 100% of an entity disregarded as separate from it, whether it was related to any tax-exempt or taxable entity, and whether it had a controlled entity within the meaning of section 512(b)(13). Across 256,539 charities’ returns in the IRS extract:

At the top of the range the structures are routine. Over $25m, 23.0% of charities own a disregarded entity and 40.6% have a controlled entity: hospital systems, universities and large human services agencies holding buildings, clinics and joint ventures in separate entities so that one activity’s liabilities and contracts sit apart from the rest. For a $500,000 organization the same structure is an exception that needs a specific reason.

Two readings. Small organizations almost never use these structures; at $250,000 to $1m, one in a hundred owns a disregarded entity and fewer than one and a half in a hundred has a controlled entity. And the middle column runs far higher than the others because “related” covers many things besides owning a business: a supporting organization, a foundation that raises money for the charity, a parent body. A related organization is not the same as an owned company.

Donations to the charity’s LLC

One practical question the formation guides miss: if a donor gives to a single member LLC the charity owns, is the gift deductible? The IRS answered it in Notice 2012-52. A gift to a domestic single member LLC that is wholly owned and controlled by a US charity is treated as a charitable contribution to a branch or division of the charity, and the charity is the donee. The acknowledgement should come from the charity, in its name and with its EIN, and say that the LLC is wholly owned by it.

Turning an LLC into a nonprofit

The reverse question, whether an existing LLC can become a nonprofit, has a different answer. An LLC owned by individuals cannot simply be declared tax exempt. The usual route is to form a nonprofit corporation, apply for exemption, and have the LLC transfer its activities or assets to it, after which the LLC is dissolved. Some states allow a statutory conversion instead, but the federal application treats you the same way either way: Form 1023 counts you as a successor if you took over another organization’s activities, took over 25% or more of its net assets, or were established on the conversion of an organization from for profit to nonprofit status, and a successor must complete Schedule G, according to the Form 1023 instructions.

The constraint that surprises LLC owners is that the move is one way. Once assets are dedicated to charitable purposes they cannot go back to the former owners, and a transfer that leaves the owners better off, a lease back, a salary well above the market, a purchase of their equipment above its value, is the private benefit the application exists to catch. How the two forms compare more generally, including whether an LLC itself can ever be a nonprofit, is in nonprofit corporation vs LLC.

Reporting it

Owning any of these brings Schedule R with the Form 990. A disregarded entity is listed in Part I; related tax-exempt organizations in Part II; related organizations taxable as partnerships in Part III; related corporations in Part IV; and transactions with them, including any payments from a controlled entity, in Part V. A charity filing the 990-EZ or 990-N cannot report any of it in this detail, which is one reason organizations that set up subsidiaries usually file the full return. The Form 990 guide explains which return applies.

Setting one up

For the commonest case, a charity creating a single member LLC to hold a risky activity, the steps are short and the discipline afterwards is the hard part.

1. A board resolution. The charity’s board approves forming the LLC, names its purpose, and says who manages it. The minutes should record why: the liability being separated.
2. The state filing. Articles of organization with the state, naming the charity as the sole member, and an operating agreement that says the same and limits the LLC’s activities to ones that further the charity’s purposes.
3. An EIN of its own, if it will have staff. A disregarded LLC is ignored for income tax but treated as separate for employment taxes, as Notice 2012-52 notes, so an LLC that employs people runs its own payroll under its own number.
4. Separate money. Its own bank account, its own books within the charity’s accounts, and its own insurance. Mixing the two is what lets a court treat the LLC as the charity and removes the shield.
5. Written terms between them. Any lease, loan or services the charity provides the LLC, or the reverse, on written terms at market rates.
6. The return. Each year the charity lists the LLC on Schedule R Part I and answers yes on Part IV line 33 of its Form 990.

When it is worth doing

An LLC for liability. Worth it when one activity carries risk out of proportion to the rest: owning property, running a camp, operating vehicles. The cost is a state filing fee, a separate set of books and the discipline of keeping it genuinely separate, because an LLC treated as a bank account of the parent loses its shield in court.

A subsidiary for a business. Worth it when an unrelated business is large enough that its income or management time threatens the charity’s exemption, or when investors or lenders need a normal corporation to deal with. Not worth it for a gift shop or a modest consulting line, which the charity can run itself and pay unrelated business tax on if needed. The rules on what a charity may sell directly are in can a nonprofit sell products.

Neither for tax avoidance. A disregarded LLC does not move income out of the charity, and rent or interest from a controlled subsidiary is taxed anyway. A structure built to dodge unrelated business income tax usually fails at the first look.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.