IRS Released Standards for LLCs to Receive Tax-Exempt Status

To receive tax-exempt status under Section 501(c)(3) of the Internal Revenue Code (the “Code”), an applicant must pass the organizational and operational tests established in Section 1.501 (c)(3)-1 of the Treasury Regulations.

These requirements require the entity to be organized and operated exclusively for charitable or exempt purposes and forbid any private shareholder or individual to receive a private benefit such as receiving part of the entity’s net earnings. 

On October 21, 2021, the Internal Revenue Service (the “Service”) released Notice 2021-56 that sets forth the organizational standards that LLCs must satisfy to qualify for tax-exempt status. Under this guidance, the following standards must be met:

  1. The IRS will recognize an LLC as tax-exempt only if both the LLC’s articles of organization and its operating agreement include:
    • Requirements that each member of the LLC be either:
      • An organization described in Section 501(c)(3) of the Code and exempt from taxation under Section 501(a) of the Code
      • A governmental unit described in Section 170(c)(1) (or wholly owned instrumentality of such a governmental unit)
    • Charitable purposes and charitable dissolution provisions in compliance with existing regulations under Section 501(c)(3) of the Code
    • The express Chapter 42 compliance provisions described in Section 508(e)(1), if the LLC is a private foundation
    • The acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its Section 501(c)(3) status) if one or more members cease to be Section 501(c)(3) organizations or governmental units (or wholly owned instrumentalities thereof)
  2. The LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable, and
  3. LLCs formed under state law that allows only certain specific provisions in their articles of organization, meet certain requirements.

The Service is seeking public comment regarding Notice 2021-56 through February 6, 2022.  Comments may be submitted in one of two ways:

  1. Electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-2020-0042 in the search field on the regulations.gov homepage to find this notice and submit comments).
  2. Alternatively, by mail to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2021-56), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

The Service strongly recommends that commenters use the electronic method to submit comments.

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