December 8, 2021
IRS Clarifies Process for LLCs Seeking Exemption under Section 501(c)(3)
The IRS issued Notice 2021-56 to clarify the criteria used for issuing a determination letter under section 501(c)(3) to a Limited Liability Company (LLC). Previously, the IRS approached granting tax exemption to LLCs in a less formal manner. The new guidance creates structure around the requirements for an LLC to be tax exempt, offering a simplified checklist that will be utilized prospectively, beginning October 21, 2021.
To receive exemption under 501(c)(3), the LLC must meet the following criteria, and incorporate the criteria into both its articles of organization and operating agreement:
- Each member of the LLC must be either an organization exempt under section 501(c)(3), a governmental unit, or a wholly owned instrumentality of government;
- The LLC must be operated for the express purpose of its exempt function, and upon dissolution, the assets of the LLC must be distributed in furtherance of an exempt purpose, or to a qualifying unit of government;
- In the case of a private foundation, the LLC must include the compliance provisions of Chapter 42 as described in section 508(e)(1); and
- An appropriate plan of action, should a member organization lose its exempt status under section 501(c)(3), or no longer qualify as a governmental unit or instrumentality.
Additionally, organizations must warrant that nothing in their articles of organization or operating agreement conflict with state LLC law, and that all provisions are legally enforceable. Organizations in states that limit language in the articles of organization may still be considered in compliance with the requirements by including the provisions solely in the operating agreement, as long as the articles of organization are consistent with the provisions.
The Notice provides welcome clarity to obtaining a tax determination for an LLC. However, the guidance only applies when seeking tax determination under section 501(c)(3). The IRS requested comment on whether similar requirements for obtaining tax determination under other paragraphs of section 501(c) should be issued, opening the possibility for future developments.
If you have questions about how this Notice or its provisions might affect your organization, please contact the Johnson Lambert Team.