Moving from a for-profit to a nonprofit business requires a number of critical steps and considerations. You'll first need to ensure your business can gain tax-exempt approval, specifically 501(c)(3) status.
Let's take a look at the key reasons why it may be a good idea to become a nonprofit, the steps required to transition your business and how to maintain tax-exempt eligibility for your business for the long term.
Is Your LLC Eligible to Become a Nonprofit?
Moving from a Limited Liability Company (LLC) to a nonprofit depends on the purpose of your business.
Does your business have an educational, scientific, charitable, religious or literary basis? Does it work on social welfare programs, including the public safety and the protection of children and animals? If so, then you may very well cover the bases required by the IRS to gain tax-exemption status.
Should I Make My Business a Nonprofit?
Even if your business is eligible to convert from an LLC to a nonprofit, keep in mind that you won't have total control over your business. Decisions for the nonprofit will fall in the hands of the board of directors or trustees.
Additionally, all of your business’s assets will belong to the nonprofit corporation and not to those who started the nonprofit. And even if the corporation fails, these assets will not revert back to you since they are no longer under your control. They would instead be transferred to another nonprofit.
But there are several reasons to move from an LLC to a nonprofit that can supersede any potential challenges, including:
- You want to work for the public good and make an impact that will benefit society.
- Your nonprofit can raise funds through donations, public and private grants, fundraisers and low-interest loans.
- A nonprofit can have nonexempt status, allowing for more of the raised and donated funds to be used for the benefit and purpose of your charity.
- Nonprofits have limited liability protection. Your personal assets, as well as those of the trustees and directors, are shielded should your nonprofit end up owing money or encounter liabilities, including lawsuits.
- Your nonprofit can be passed down to your children, grandchildren and future generations, allowing them to continue your work for the public good. (Some nonprofits have been in existence for hundreds of years!)
Steps to Convert an LLC to a Nonprofit
Once you’ve determined that your business is a good candidate for becoming a nonprofit, it’s time to proceed with making the necessary changes to your corporate structure.
1. Choose a Name for Your Nonprofit
Make sure that your name identifies with your charitable cause. Also, make sure that the name is available and not already taken by another organization.
2. Create a Business Plan
Have a business plan, which will include the purpose of your charity. Having a clear mission for your business and articulating your mission will be critical when it comes to fundraising efforts.
3. Assign a Board of Directors
Depending on your state, you may be required to have a certain number of people as part of your board of directors. For the well-being of your nonprofit, it’s important that you choose the right people to serve as directors, as well as meet the state’s requirement when it comes to the number of directors.
4. File Articles of Incorporation
Some states will allow you to file Articles of Conversion to convert your LLC to a nonprofit. You'll need to list a Registered Agent, name your board of directors, establish your bylaws, create an Operating Agreement and complete the application, which is available online with your Secretary of State. Depending on your state's requirements, you may instead be required to dissolve your LLC first and then form a new corporation for your nonprofit.
5. Transfer Assets
Transfer your LLC’s assets to the nonprofit. This can be accomplished automatically once you file your Articles of Conversion. If you file Articles of Incorporation, the transfer of assets, along with any debts from the LLC, will need to be done manually. This will require the approval of the nonprofit's board of directors and should include a written agreement outlining the details of the transfer to the new corporation.
6. File for 501(c)(3) Status
File with the IRS for tax exemption status under 501(c)(3). This can be initiated by going to their site and completing Form 1023. If you fill out the form properly and meet the requirements, the IRS will notify you of your application's approval.
How to Maintain Your Nonprofit Business
If you followed the above steps, set up your corporation and received approval from the IRS for tax-exempt status, then congratulations! Having your tax exemption 501(c)(3) status means that your nonprofit does not need to pay taxes. This will allow you to redirect money to your charity, support more social causes and make an impact.
However, in order to maintain your tax-exempt status, you’ll need to:
- Keep up with your state filings, correspondence and fee requirements. This will need to be done at both the state and federal level.
- Follow your state’s guidance when it comes to registering for events, especially before fundraising endeavors.
- Secure the proper licenses and permits when holding fundraising events, especially when it comes to selling food or alcohol.
- Keep track of your board meetings.
- Report taxes withheld (quarterly) and file your annual taxes.
Remember: Nonprofits are under a lot of scrutiny by the government. Make sure that you keep accurate records and follow your state’s requirements and filing to avoid any potential issues that may affect your nonprofit and the mission of your corporation. Unintended scrutiny by the IRS due to inaccurate records or missing filings can prove problematic to your organization.
Get Started with a Nonprofit Guide
Starting a nonprofit is an excellent way to not only address social issues but also fund and support them. And though much of the money raised by nonprofits comes from donations, they are also tax write-offs that donors can take on their taxes, making the act of giving a win-win scenario.
If you’ve come to the decision that a nonprofit is the right choice, and you are ready to move ahead and apply for your tax-exemption status, use our How to Start a Nonprofit Guide to help you with your next steps and to learn more about the benefits of moving from an LLC to a nonprofit.
Peter Mavrikis
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.
