Individually owned LLC denied section 501(c)(3) status

Plain-English summary

A single-member limited liability company applied for section 501(c)(3) recognition while proposing a food bank and a free senior center for low-income people. Its articles stated no exempt purpose, contained no charitable dissolution clause, and named an individual as the sole member. Those terms did not satisfy Notice 2021-56, which generally requires an exempt LLC's members to be section 501(c)(3) organizations or governmental units and requires charitable purpose, dissolution, and contingency provisions. The IRS had twice advised the applicant to change its entity type to a nonprofit corporation or unincorporated association, but it did not do so. The IRS denied exemption because the LLC was not organized exclusively for exempt purposes and made the determination final after no protest was filed.

Ruling snapshot

• Question: Does the individually owned LLC qualify for exemption under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 170(c)(1), 501(c)(3), 508(e)(1); Treas. Reg. § 1.501(c)(3)-1(b); Notice 2021-56

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 08/01/2024
IRS Tax Exempt and Government Entities Employer ID number:

Release Number: 202443023
UIL Code: 501.00-00,
501.03-00

Person to contact:

Dear :

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal
Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent
you a proposed adverse determination in response to your application. The proposed adverse determination
explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we
didn't receive a protest within the required 30 days, the proposed determination is now final.

Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't
deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this
letter unless you request an extension of time to file. For further instructions, forms, and information, visit
www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the
enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how
to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have questions
about your federal income tax status and responsibilities, call our customer service number at 800-829-1040
(TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service

Date: 06/06/2024

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend:
V = Date
W = State
X = Name
Y = Number Range

UIL:
501.00-00
501.03-00

Dear :

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You were formed on V, in the state of W, as a Limited Liability Company (LLC). Per your articles of
organization, your sole member is X. Your organizing document does not declare a stated purpose, nor does it
include a dissolution clause.

You indicated that you will be involved with projects that operate strictly for the benefit of the less privileged
and of senior citizens with limited income. Any profits or income derived from your projects will go back to
your base fund and will be used for expansion and operation improvement.

You stated that initial funding for your projects will come from private donations and loans pre-arranged
between private parties. You will not engage in any public fundraising.

Your projects include a food bank that will distribute food to the needy in the local community and a Senior
Citizen Center. Recipients of food distributions are not required to pay. Cash donations will be accepted to
defray your cost of operations. The community center is a place for the elderly to gather, meet, exercise, learn

and help one another. There are no membership fees charged to use the facility.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

You will be responsible for setting up projects, building the facilities, hiring staff and overseeing operations.
You stated that, as the sole member of the organization, X will spend Y hours per week on these projects.

We sent you Letter 1312 two times advising you to change your entity type to a non-profit corporation or as an
unincorporated association. You did not make the change.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of
the purposes specified in such Section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization limit the purposes of the organization to one or more
exempt purposes and do not expressly empower the organization to engage, other than as an insubstantial part
of its activities, in activities that are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(2) provides that the term articles of organization or articles includes the
trust instrument, the corporate charter, the articles of association, or any other written instrument by which an
organization is created.

Treas. Reg. Sec. 1.501(c)(3)-1(b)(4) provides that, for an organization to be exempt and described in IRC
Section 501(c)(3), the organization must dedicate its assets to an exempt purpose by operation of the law, or a
provision in the organization's Articles of Incorporation, or to the federal government, or to a state or local
government for a public purpose, or assets would be distributed by a court to another organization that would
meet similar purposes as the dissolved organization was organized to meet. An organization will not be
considered exempt if its assets are not dedicated to an exempt purpose.

Notice 2021-56, Standards for Section 501(c)(3) Status of Limited Liability Companies, lists required
provisions of LLC’s articles of organization and operating agreement:

1. Each member of the LLC 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 in compliance with Treas. Reg. Section
   1.501(c)(3)-1(b)(1)and(4).

3. The express chapter 42 compliance provisions described in Section 508(e)(1), if the LLC is a private

foundation.

4. An acceptable contingency plan in the event that one or more members cease to be Section

501(c)(3) organizations or governmental units (or wholly-owned instrumentalities thereof).

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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of IRC Section 501(c)(3). IRC
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. Section
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
IRC Section 501(c)(3). You have failed to meet both requirements.

You were formed as a Limited Liability Corporation and your articles of organization state no exempt purpose.
Because your articles of organization do not limit your purposes to those described in Treas. Reg. Section
1.501(c)(3)-1(b)(1)(i) or dedicate your assets upon dissolution to exempt organizations as described in Treas.
Reg. Section 1.501(c)(3)-1(b)(4) you fail the organizational test under IRC Section 501(c)(3).

Your articles of organization do not meet the requirements outlined in Notice 2021-56:

• Your articles of organization do not limit your membership to organizations exempt under IRC Section
501(c)(3) or a governmental unit described in IRC Section 170(c)(1); instead, your members are
individuals, which violates the prohibition against inurement under IRC Section 501(c)(3).

• Your articles of organization do not limit your purpose to one or more exempt purposes under IRC
Section 501(c)(3) and do not expressly empower you to engage in activities that are not in furtherance of
one or more exempt purposes. Also, your articles of organization do not limit the distribution of your
assets upon dissolution for one or more exempt purposes.

• Your members are individuals. Therefore, you do not have a contingency plan if one or more members
cease to be exempt under IRC Section 501(c)(3) or governmental units (or wholly owned
instrumentalities thereof).

You do not meet the organizational requirements of an LLC as described in Notice 2021-56. Your articles of
organization do not limit your purpose or dedicate your assets to one or more exempt purposes as required
under IRC Section 501(c)(3). We sent you Letter 1312 two times advising you to change your entity type to a
non-profit corporation or as an unincorporated association. You did not make the change. You are still
incorporated in the state of W, as a Limited Liability Company (LLC). As a result, you have not satisfied the
organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4).

Conclusion

Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an
organization described in IRC Section 501(c)(3). You are formed as a Limited Liability Company. Your articles
of organization do not limit your purposes to one or more exempt purposes and do not dedicate your assets upon
dissolution to an exempt purpose. Therefore, you do not qualify for tax exemption under Section 501(c)(3)
because you are not organized exclusively for purposes described in Section 501(c)(3).

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:
• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference
• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative
• The following declaration:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,
and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

PO Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K