Merging of Nonprofit and For-Profit Worlds

For those who don’t read the dicta of IRS publications, recently there was an announcement that the Internal Revenue Service (IRS) was looking to simplify standards to allow limited liability companies (LLC) to become charitable tax-exempt 501(c3) organizations. Sound complicated….you aren’t kidding.

While still in its infancy, this issue of the merging of for-profit principles into the nonprofit world has been developing for several decades. Many large philanthropists want more flexibility, and most likely less reporting, than a private business would provide. However, they want the ability to make a difference in the world. Thus, this policy pushed a question.

Basically, the nonprofit as an LLC would operate more like a for-profit company with the benefits of not having to pay taxes. Obviously, they would have to make and define the “community benefit” from their nonprofit status. But it even gets more complicated when you look at state laws. Most states don’t allow LLCs to be anything but for-profit. So just finding the right state to file in becomes your first hurdle if you’re interested in this kind of organization.

I’m always most interested in unforeseen challenges or issues. One of the hallmarks of the nonprofit world, most of the time through IRS form 990 reporting, is a sense of openness. What did they give money to or how was it used? Who’s on the board? How much are people being paid? What were the basic finances? All of these questions can generally be answered by looking at a nonprofit’s IRS form 990. Does an LLC with a nonprofit status have to disclose and declare the same? How will the community or the general public know all of this information? And should they?

This issue is just beginning. As been shown and discussed many times here and in other places, with fewer people making a larger impact on philanthropy, those with influence are going to drive the nonprofit governance structure to where it best advantages them. Whether or not that’s a good thing is yet to be decided.