The IRS recently released an advance copy of Notice 2021-56, which is due to be published in IRB 2021-45 on Nov. 8, 2021, setting forth standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as exempt from federal income tax under section 501(a) and described in section 501(c)(3). The notice does not affect any LLCs currently recognized as described in section 501(c)(3); however, it does apply to any LLCs submitting a Form 1023, Application for Recognition of Exemption under section 501(c)(3) of the Internal Revenue Code, after Oct. 21, 2021.


Domestic LLCs generally are known as eligible entities under Reg. sections 301.7701-3(a) and, as such, are either (1) disregarded entities, (2) corporations or (3) partnerships for U.S. income tax purposes. A domestic LLC that does not file an election generally is a disregarded entity if it has a single member, or a partnership if it has two or more members. A domestic LLC generally can elect to be classified as a corporation if it has one or more members, or as a partnership if it has at least two members. However, pursuant to Reg. sections 301.7701-3(c)(1)(v)(A), an LLC that has been determined to be, or claims to be, exempt from tax under section 501(a) is treated as having made an election to be classified as a corporation.

The section 501(c)(3) regulations do not specifically address LLCs or how such entities can satisfy the organizational requirements for exemption. Historically, the IRS determinations agents have followed the Limited Liability Company Reference Guide Sheet and accompanying Instructions, in issuing determination letters to LLCs. Generally, these internal guidelines have required that each member of the LLC be described in section 501(c)(3), governmental units or wholly-owned instrumentalities of a state or political subdivision thereof. 

Notice 2021-56 standards for LLC exemption under section 501(c)(3) 

LLCs submitting Forms 1023 after Oct. 21, 2021 must comply with sections 3.02 and 3.03 of the notice, in addition to the general requirements of section 501(c)(3), in order to receive a favorable determination letter under section 501(c)(3).

Section 3.02 sets forth four provisions required to be in an LLC’s articles of organization and operating agreement:

  1. Each member of the LLC must be either (i) an organization described in section 501(c)(3) and exempt from taxation under section 501(a), or (ii) a governmental unit described in section 170(c)(1) (or wholly-owned instrumentality of such a governmental unit).
  2. Express charitable purposes and charitable dissolution provisions as set forth in Reg. sections 1.501(c)(3)-1(b)(1) and (4).
  3. If the LLC is intended to be a private foundation, the express chapter 42 compliance provisions described in section 508(e)(1).
  4. An acceptable contingency plan in the event that one or more members ceases to be section 501(c)(3) organizations or governmental units (e.g., suspension of membership rights until the member regains recognition of its section 501(c)(3) status).

To the extent that state LLC law prohibits the addition of any of these provisions to the articles of organization, the LLC will meet the requirements of this section if the operating agreement contains the required provisions. In addition, neither the articles of organization, nor the operating agreement may include any provisions inconsistent with the foregoing.

Section 3.03 requires the LLC to represent that all provisions in its articles of organization and operating agreement are consistent with the applicable state LLC law and are largely enforceable.

Request for public comments

In addition to requesting comments on the standards set forth in the notice, the IRS specifically requests comments with respect to the following:

  1. Potential advantages and disadvantages for structuring charitable entities as LLCs rather than as state non-profit corporations or charitable trusts.
  2. Degree of application of state laws regulating charitable assets to those held by LLCs as compared to those held by trusts or state non-profit corporations.
  3. Whether states that require LLCs to have a profit-seeking enterprise permit an LLC to be formed exclusively for section 501(c)(3) purposes.
  4. Whether states that require distribution of net assets to LLC members would permit and enforce a disclaimer that would result in assigning or transferring their interests to another section 501(c)(3) organization.
  5. Whether any state laws satisfy the dissolution and section 508(e) requirements for charitable LLCs and whether there is any reason to not require the provisions in both the articles of organization and the operating agreement.
  6. Because some states restrict language that can be included in an LLC’s articles of organization, whether the relevant regulations should be updated to accommodate such state laws, and whether it matters if a state does not require the operating agreement to be filed with the state.
  7. Whether states that have nonprofit LLC laws restrict charitable LLCs to formation under that law or permit them to be formed under the state’s general LLC law.
  8. Whether manager-managed LLCs should be treated the same way as member-managed LLCs for section 501(c)(3) purposes, and whether LLC managers should be treated as officers, e.g., for chapter 42 purposes.
  9. Whether there are other provisions of LLC law in one or more states that may affect the ability of an LLC to qualify under section 501(c)(3).
  10. Whether any specific provisions should be included in an LLC’s articles of organization and operating agreement in addition to, or in lieu of, those discussed above.
  11. Whether there are circumstances in which an LLC seeking recognition under section 501(c)(3) should be permitted to have members that are not section 501(c)(3) organizations, governmental units or wholly-owned instrumentalities of governmental units.

The IRS also requests comments as to whether there should be special requirements or considerations for LLCs applying for recognition of exemption under other paragraphs of section 501(c).

All comments should be submitted by Feb. 6, 2022.

This article was written by Alexandra O. Mitchell and originally appeared on 2021-10-21.
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