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:
- 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)
- Requirements that each member of the LLC be either:
- 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
- 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:
- 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).
- 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.
