IRS Issues Notice Regarding Standards for 501(c)(3) Status of Limited Liability Companies

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On October 21, 2021, the Internal Revenue Service (the “IRS”) published Notice 2021-56. The Notice sets forth current standards that a limited liability company (“LLC”) must satisfy to receive a determination letter recognizing it as tax-exempt pursuant to sections 501(a) and 501(c)(3) of the Internal Revenue Code (the “Code”).  While the IRS has provided informal guidance in the 2000 and 2001 Exempt Organizations Continuing Professional Education articles, the Notice represents the first formal guidance from the IRS for LLCs seeking to qualify for federal tax exemption.

Under the Notice, the IRS will issue a determination letter recognizing an LLC as exempt from tax and described in section 501(c)(3) only if both the LLC’s articles of organization and its operating agreement include:

  • Provisions requiring that each member of the LLC be either:
    • An organization described in section 501(c)(3) and exempt from taxation under section 501(a), or
    • A governmental unit described in section 170(c)(1) (or wholly owned instrumentality of such a governmental unit);
  • Express charitable purposes and charitable dissolution provisions in compliance with existing regulations under section 501(c)(3);
  • The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private foundation; and
  • An acceptable contingency plan in the event that one or more members cease to be section 501(c)(3) organizations or governmental units (or wholly owned instrumentalities thereof).

Any LLC submitting a Form 1023 after October 21, 2021 must meet the foregoing standards in order to obtain a favorable determination letter from the IRS.

To assist the U.S. Treasury Department and the IRS in determining whether additional guidance is needed, the Notice requested public comments on the standards, as well as on specific issues relating to tax-exempt status for LLCs. The laws governing LLCs vary by state and various Attorneys General and bar associations have been digesting the Notice and submitting their comments.

The Notice does not affect the status of organizations currently recognized as exempt under section 501(c)(3).

 

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