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October 26, 2021

IRS establishes standards for LLCs to receive exemption under IRC Section 501(c)(3)

In Notice 2021-56 (the Notice), the IRS has established standards that a limited liability company (LLC) must satisfy to be recognized as a tax-exempt organization described in IRC Section 501(c)(3). The IRS notes that these new requirements will not affect the IRC Section 501(c)(3) status of current tax-exempt entities, and requests public comments on a detailed list of specific issues.


The Notice points out that the organizational test under Treas. Reg. Section 1.501(c)(3)-1(b) does not specifically address LLCs, and that the IRS and Treasury have never issued formal guidance explaining how LLCs can qualify as IRC Section 501(c)(3) entities. "Historically," the Notice explains, "the standards that the IRS has applied for purposes of issuing determination letters have generally included a requirement that all the members of an LLC must themselves be Section 501(c)(3) organizations, governmental units, or wholly owned instrumentalities of a state or political subdivision thereof."

In contemplation of this new guidance, the IRS and Treasury reviewed state laws governing not-for-profit (or nonstock) corporations and charitable trusts, finding that LLC laws (1) in a few states "may not allow an LLC to be organized and operated exclusively for charitable purposes" and (2) in most states include default provisions giving LLC members "certain economic rights that would be inconsistent with Section 501(c)(3) requirements if the members were 'private shareholders or individuals' within the meaning of [Reg. Section] 1.501(a)-1(c)."

501(c)(3) standards for LLCs

The Notice states that Treasury and the IRS will construe the code and regulations under IRC Section 501(c)(3) as permitting the IRS to issue a favorable determination letter to an LLC that submits a Form 1023 after October 21, 2021 if, in addition to the general requirements under IRC Section 501(c)(3), the LLC satisfies the following additional requirements.

LLC articles of organization and operating agreement

Section 3.02 of the Notice provides that the IRS will issue a determination letter recognizing an LLC as tax-exempt under IRC Section 501(c)(3) if the LLC's articles of organization and its operating agreement each include four things:

  1. Provisions requiring each member of the LLC to be either (i) an IRC Section 501(c)(3) entity and tax-exempt under IRC Section 501(a), or (ii) a governmental unit described in IRC Section 170(c)(1) or wholly owned instrumentality of such a governmental unit
  2. Charitable-purpose and charitable-dissolution provisions in compliance with Reg. Sections 1.501(c)(3)-1(b)(1) and (4)
  3. Provisions required for compliance with chapter 42 as described in IRC Section 508(e)(1) — if the LLC is a private foundation
  4. An acceptable contingency plan (such as suspension of membership rights until a member regains IRS recognition of its 501(c)(3) status) that would take effect if one or more members ceased to be an IRC Section 501(c)(3) organization, governmental unit or wholly owned instrumentality of a governmental unit

Representation on enforceability

Under section 3.03 of the Notice, an LLC that wants to be recognized as an IRC Section 501(c)(3) organization "must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable."

State limitations on an LLC's articles of organization

Section 3.04 of the Notice addresses how LLCs may satisfy the requirements of section 3.02 if state law prohibits an LLC's articles of organization from including the types of provisions listed in section 3.02. Under these circumstances, an LLC may successfully apply for IRS recognition of IRC Section 501(c)(3) status if it (1) includes in its operating agreement (but not in its articles of organization) the four enumerated provisions under section 3.02 of the Notice, as described previously, and (2) does not include any inconsistent provisions in either its operating agreement or articles of organization.

Request for comments

The IRS requests public comments on multiple issues involving IRC Section 501(c)(3) exemption for LLCs, including:

  • Whether LLCs that include members other than public charities, governmental units, or instrumentalities of a state or political subdivision should qualify for exemption under IRC Section 501(c)(3) and, if so, what specific safeguards would ensure the LLC could satisfy IRC Section 501(c)(3) exemption standards
  • Whether state LLC laws permit LLCs to be formed for charitable purposes, how state laws regulating charitable assets apply to LLCs, and whether an LLC's members can disclaim any financial interests they might have in the LLC under state law
  • Whether IRS recognition of tax-exempt status under other sections of the IRC is appropriate for LLCs and, if so, what special requirements should apply

Comments should be submitted to the IRS by February 6, 2022. Although comments may be submitted in hard copy, electronic delivery is preferable. Electronic comments may be sent through the Federal eRulemaking Portal at; type IRS-2020–0042 in the search field to find the Notice and submit a comment.


The IRS issued regulations on the organizational test for IRC Section 501(c)(3) exemption in 1959, before the enactment of the first LLC statute in the United States. Accordingly, those regulations do not specifically address LLCs. Although the IRS published a Continuing Professional Education (CPE) Text for its employees in 2001 addressing 501(c)(3) exemption standards for LLCs (see TopicB01.PDF (, this was not authoritative, and the IRS had not issued any authoritative guidance addressing 501(c)(3) exemption standards for LLCs. In the meantime, states' LLC regulations have become more robust, and often contain requirements that do not harmonize with IRC Section 501(c)(3) exemption standards. The Notice is consistent with the IRC Section 501(c)(3) exemption standards for LLCs described in the IRS's 20-year-old CPE Text, but summarizes and simplifies those standards. Like the CPE Text, the Notice affirms that a tax-exempt LLC must be organized and operated exclusively for exempt purposes, may not generate any prohibited private benefit or inurement to its members, and must include charitable purpose and dissolution language in both its articles of incorporation and its operating agreement. Although the IRS may refine the exemption standards in the Notice based on public comment, any such refinements will clarify — but not nullify — the application of these three general requirements for IRC Section 501(c)(3) exemption.


Contact Information
For additional information concerning this Alert, please contact:
Tax-Exempt Organization Services
   • Stephen Clarke (
   • Kristen Farr Capizzi (
   • Regina Vasilopoulos (