Q: I am wanting to start a nonprofit LLC in Kentucky… will you all be able to help me with this?
Thank you to Rae (@realchairmanrae) in Kentucky for that great question! The vast majority of nonprofit businesses are created as corporations, but a few states—like Kentucky—will allow you to create a nonprofit LLC. While Northwest doesn’t currently provide filing services for nonprofit LLCs, we can certainly point you in the right direction when it comes to getting your business up and running. Here’s what you need to know about forming a nonprofit LLC in Kentucky:
1. Understand the nonprofit LLC entity type
When selecting a business structure for your nonprofit organization in Kentucky, you have the option of choosing between a corporation or an LLC. While both entity types offer liability protection, corporations tend to cost more money and require more red tape. An LLC will give you more flexibility when it comes to running your business. (See LLC vs. Corporation.)
Why don’t more people own nonprofit LLCs?
For one thing, most states don’t recognize nonprofit LLCs as a legal entity type. (Kentucky is the exception, not the rule.) For another, it’s more difficult for LLCs to qualify for nonprofit status at the federal level. This is in part because the IRS will only recognize an LLC’s 501(c)(3) status if all its members also qualify for tax-exempt status.
2. Determine Kentucky nonprofit LLC ownership
One of the major stipulations of forming a nonprofit LLC—at least when it comes to qualifying for federal tax-exempt status—is proving your company’s members already meet the IRS’s 501(c)(3) exemption requirements. This means your nonprofit LLC will most likely need to be owned by another tax-exempt entity, like another Kentucky nonprofit.
3. File Kentucky Articles of Organization
Got your ownership structure in place? You can officially register a nonprofit LLC in Kentucky by filing Articles of Organization – Nonprofit Limited Liability Company. Here’s what you’ll need to include:
- Name of nonprofit LLC
- Name and address of Kentucky registered agent
- Mailing address of nonprofit LLC (street number or P.O. Box)
- Management structure (either managed by members or managers)
- Purpose of nonprofit LLC
- Veteran-owned (only check if your nonprofit is at least 50% veteran-owned)
- Signature(s) of organizers (the person or people filing on behalf of your company)
- Signature of registered agent
- Filing fee of $40
You’ll also want to apply for state tax-exemptions. See our guide on Kentucky Tax Exemptions.
What should I put as the “purpose” of my Kentucky nonprofit LLC?
This is important: when forming an LLC as a nonprofit, you must list the specific reason why your organization qualifies as a tax-exempt nonprofit. Acceptable categories include, but are not limited to: charitable work, educational services, religious organizations, trade associations. A more robust list is included in the filing instructions for the nonprofit LLC articles of organization form.
How do I submit articles of organization for my Kentucky nonprofit LLC?
Your nonprofit articles of organization form can be submitted to the office of the Secretary of State either online, by mail or in person.
Online: Kentucky Business One Stop Portal
By Mail:
Office of the Secretary of State
P. O. Box 718
Frankfort, KY 40602-0718
In Person:
Capitol Building
700 Capital Avenue
Frankfort, KY 40601
4. Create a Kentucky nonprofit LLC operating agreement
In order to qualify for federal tax-exempt status as a 501(c)(3) nonprofit, you’ll need to make sure your Kentucky LLC Operating Agreement lays out, very specifically, how your organization operates to fulfill a tax-exempt purpose.
It takes a lot to qualify as a non-tax-paying entity—particularly if you’re an LLC. For this reason, the IRS provides a Limited Liability Company Reference Guide Sheet with 12 questions you can answer to determine whether or not your company meets the qualifications.
5. Apply for federal tax-exempt status
Here’s where things can get tricky. You may apply for federal 501(c)(3) status for your Kentucky nonprofit LLC the way most tax-exempt organizations do: by submitting Form 1023. However, doing so means that the IRS will view your nonprofit as a corporation for tax purposes. (Even if you gain tax-exempt status, that won’t protect your LLC from paying certain taxes, like employee tax.)
If, by forming an LLC, you hope to avoid being taxed as a corporation altogether, you’ll need to make sure the finances of your nonprofit LLC go through its parent organization(s). If your company is owned by one member, it will be treated as a disregarded entity. If it’s owned by two or more members, it will be treated as a partnership.
Taxes are complicated—and so is forming a nonprofit LLC. If you’re considering forming a nonprofit LLC in Kentucky, it’s a good idea to consult with a business attorney or CPA.