The use of limited liability companies has exploded in the for-profit world and te tax-exempt world is catching on. So how can a limited liability company be used in the tax-exempt world?
Let us count the ways:
- Create A Joint Venture with Other Tax-Exempt Organizations
Multiple tax-exempt organizations can together form a limited liability company to engage in exempt activities. So long as the activity of the limited liability company is within the purview of the exempt purposes of all of the tax-exempt members of the limited liability company, the income generated by the limited liability company and allocated to its members generally will not be considered unrelated business taxable income.
- Isolate Risky Assets
Single-member limited liability companies are often used to separate and segregate risky assets or activities. A typical example is the transfer of real estate, such as rental property or a property with potential environmental issues, to a single-member limited liability company. The single-member limited liability company provides a level of liability protection between the limited liability company and the assets of its tax-exempt parent. Even though the single-member limited liability company is a separate entity for corporate law purposes, it is, by default, a disregarded entity for federal income tax purposes. This means that the income and activities of the single-member limited liability company are considered the income and activities of its owner.
- Separate Different Activities
A tax-exempt organization engaged in multiple, often very different, activities can use single- member limited liabilities to separate the activities. This allows the tax-exempt parent to easily account for different activities while keeping a simple overall tax structure.
Although a single-member limited liability company is ignored for federal income tax purposes, a multi-member limited liability company is treated as a partnership by default for federal income tax purposes. As a result, the limited liability company must file its own Rachel G. Windercollege-preparatory boarding school, a residential camp or a child day camp to follow certain protocols that would allow each entity to maintain two epinephrine autoinjectors on-site in cases of emergency. informational federal income tax return and allocate its income among its members based on their relative interests in the limited liability company. Such income may or may not be unrelated business taxable income depending on the activities and structure of the limited liability company. A not-for-profit limited liability company may also obtain separate tax-exempt status in certain circumstances, but the process is complex and outside of the scope of this article.
The potential use of limited liability companies is endless in the tax-exempt world. However, there are important considerations. Does the state of formation allow for the formation of not-for-profit limited liability companies? If exempt use property is transferred to a single-member limited liability company, does this preclude or otherwise adversely affect real property tax exemption under applicable state law? Are potential donors concerned or confused by the use of single-member limited liability companies? If a tax-exempt organization is becoming a member of a multi- member limited liability company, has the tax-exempt organization addressed potential unrelated business income tax issues? These considerations, among others, should be discussed with your tax advisor prior to utilizing a limited liability company.