Nonprofits often look for ways to collaborate with businesses or expand their mission through different structures, including Limited Liability Companies (LLCs). However, transferring funds from a 501(c)(3) charity to an LLC raises legal and tax compliance concerns that must be carefully considered.
Can a 501(c)(3) Nonprofit Give Money to an LLC?
The short answer is yes, but only under specific circumstances. The IRS and state laws require that a nonprofit’s funds be used exclusively for charitable purposes. If a charity transfers funds to an LLC, it must ensure that:
The funds are used for charitable, tax-exempt purposes
The LLC’s activities align with the nonprofit’s mission
There is proper oversight to prevent private benefit
If the LLC operates for profit and does not serve a charitable purpose, the transaction could violate nonprofit regulations, putting the charity’s tax-exempt status at risk.
Situations Where a Nonprofit Might Transfer Funds to an LLC
1. The LLC is a Wholly Owned Subsidiary of the Nonprofit
A 501(c)(3) nonprofit can own an LLC as a subsidiary to conduct business activities. In this case, transferring funds is typically allowed if:
The LLC’s profits are used to support the nonprofit’s mission.
The LLC is structured as a disregarded entity (if single-member) or a tax-exempt LLC under IRS rules.
However, if the LLC engages in significant commercial activity unrelated to the nonprofit’s mission, it may generate Unrelated Business Income Tax (UBIT).
2. The LLC is Operating a Charitable Program
If an LLC is running a program that aligns with a nonprofit’s mission—such as a social enterprise, affordable housing project, or educational initiative—a nonprofit may fund the LLC as long as:
The funds are restricted to charitable activities.
The nonprofit establishes grant agreements or contracts to ensure compliance.
3. The Nonprofit is Making a Program-Related Investment (PRI)
Some private foundations and public charities can invest in an LLC through a Program-Related Investment (PRI). A PRI allows nonprofits to provide loans or investments to mission-aligned businesses, provided the primary goal is charitable rather than financial return.
Situations Where Transfers Could Violate IRS Rules
If the LLC is owned by private individuals (such as board members or executives), transferring funds could be considered private inurement or self-dealing, leading to IRS penalties.
If the funds are used for commercial purposes unrelated to the nonprofit’s mission, the IRS may classify the transfer as an improper use of tax-exempt funds.
If the nonprofit receives little or no benefit from the transaction, the IRS may see the transfer as an unauthorized distribution of charitable assets.
Best Practices for Transferring Funds to an LLC
Document the Purpose: Ensure the funds are being used for charitable activities and align with your nonprofit’s mission.
Establish a Written Agreement: If funding an LLC, use grants, contracts, or investment agreements to specify how the funds can be used.
Maintain Oversight: The nonprofit should monitor how the funds are used to ensure compliance.
Consult Legal & Tax Professionals: Given the complexity of nonprofit-LLC transactions, seek guidance from a nonprofit attorney or tax expert.
Need Help with Structuring Your Nonprofit’s Business Activities?
If your nonprofit is considering working with or funding an LLC, InstantNonprofit’s support team can help you navigate legal and compliance requirements. Reach out for guidance on structuring your organization’s activities properly!