When a nonprofit operates through multiple affiliated entities—all furthering the same exempt purpose [for example, under section 501(c)(3)]—structuring those affiliates under one or more LLCs can provide significant efficiencies. As a tax attorney practicing in this space, I help nonprofit clients balance liability protection, tax compliance, and administrative efficiency with their commercial goals, using LLCs. Below are some important considerations for this type of planning.

U.S. Federal Income Tax Considerations

A nonprofit parent that has already obtained tax-exempt status (by filing a Form 1023 application for exemption and receiving IRS approval) can form one or more single-member LLCs, which default to treatment as a disregarded entity for U.S. federal income tax purposes. This type of structuring can provide some key benefits:

1. Administrative simplification & cost efficiencies: No need for additional filings of Form 1023 application for exemption filings, or annual Form 990 tax exempt organization income tax returns. As long as the LLC meets the typical organizational and operational tests (was organized for and is operated for the same exempt purposes as the parent), it need not apply to obtain its own federal tax exemption, and its income, expenses and assets flow through to and are reported on the parent company’s Form 990 each year.
2. Risk management: Utilize multiple LLCs to isolate activities presenting higher risk from those with relatively lower risk, as well as separate key assets or property from entities conducting activities with higher risk. Assuming adherence to proper corporate governance principles, each LLC provides liability protection like a corporation. This structuring can help a nonprofit group efficiently manage its overall risk profile.
3. Commercial branding: LLCs are easy to form and operate, offering flexibility to align the group’s desired commercial branding with various operating entities, whether unified or specific branding based on the entity and activity.

U.S. State & Local Tax Considerations

U.S. federal income tax exemption does not guarantee exemption from state and local taxes. Importantly, states levy various types of taxes, such as income, franchise, property, and sales and use taxes. Below are some key considerations in the state and local tax context:

1. State & Local Tax conformity to the Internal Revenue Code (IRC): For purposes of income tax, states and localities may or may not follow the IRC, or may follow the IRC generally but provide state statutory exceptions to certain IRC provisions.
2. Other State & Local Tax types: States and localities may require specific tax exemption applications for different tax types. Additionally, the state and local requirements for these tax exemption applications may differ based on entity type and/or tax treatment of the entity (i.e., corporation, LLC, partnership), or location of the entity or its assets or property.

As always, it’s important to have an experienced tax attorney evaluate the specific facts, circumstances, and applicable law in this type of structuring. With proper planning, it is possible for nonprofits to achieve administrative simplification and cost efficiencies in the federal, state and local tax contexts using LLCs.