Overview
The IRS issued Notice 2021-56 providing standards that a limited liability company (LLC) must meet for recognition as tax-exempt under section 501(a) and described in section 501(c)(3). The IRS will issue a determination letter recognizing an LLC as exempt from tax under section 501(c)(3) only if both the LLC's articles of organization and its operating agreement each include:
(1) Requirements that each member of the LLC is either an organization described in section 501(c)(3) or a governmental unit or wholly-owned government instrumentality described in section 170(c)(1);
(2) Express charitable purposes and charitable dissolution provisions;
(3) If the LLC is a private foundation, the chapter 42 compliance provisions described in section 508(e)(1); and
(4) An acceptable contingency plan in the event that one or more of its members cease to be section 501(c)(3) organizations or governmental units.
If an LLC is formed under a state LLC law that prohibits the addition of provisions to its articles of organization other than those required by state LLC law, these requirements will be deemed satisfied if the LLC’s operating agreement includes these requirements and the articles of organization do not include any inconsistent provisions.
This guidance provides a welcome update on the qualification of LLCs as section 501(c)(3) organizations, considering that the regulations under section 501(c)(3) were issued prior to the enactment of the first LLC statute in the United States, and the IRS had not issued other formal guidance on the topic. Notice 2021-56 notes that it does not affect the status of organizations currently recognized as described in section 501(c)(3).
The Treasury Department and the IRS seek comments on the standards included in Notice 2021-56 and feedback on issues relating to the interaction of state laws governing LLCs and the section 501(c)(3) requirements. Comments may be submitted by February 6, 2022.
