REG 6 and 7 - Limited Liability Companies (LLC) and Tax-Exempt Organization

Characteristics of LLCs

• Limited Liability

• Pass-Through Taxation

• Flexibility

• Ease of Formation and Maintenance

• Operating Agreement

• Membership

Taxation of LLCs

• Automatic Selection

  • Single-Member LLC

    • If an LLC has only one owner called a member, the IRS automatically classifies it as a disregarded entity for tax purposes.

    • The LLC's income or loss is reported on the owner's personal tax return on Form 1040. However, an LLC can elect to be taxed as a corporation.

  • Multi-Member LLC

    • If an LLC has two or more members, the IRS automatically classifies it as a partnership for tax purposes.

    • The LLC must file an annual informational return on Form 1065, and the income or loss of the LLC is passed through to the owners, who report it on their personal tax returns on Form 1040. However, an LLC can elect to be taxed as a corporation.

• Election

  • An LLC can elect to be taxed as a corporation

Tax Exempt Organizations

• Religious Organizations.
  Example: Local Churches, Temples, Mosques

• Educational Organizations.
  Example: Universities, Colleges, Private Schools

• Charitable Organizations.
  Example: American Red Cross, Salvation Army

• Scientific Organizations.
  Example: Research Institutes

• Literary Organizations.
  Example: Poetry Foundation

• Organizations that Test for Public Safety.
  Example: Underwriters Laboratories

• Organizations for Prevention of Cruelty to Children or Animals.
  Example: American Society for the Prevention of Cruelty to Animals (ASPCA)

• Social Welfare Organizations.
  Example: NAACP, National Rifle Association

• Civic Leagues and Local Employee Associations.
  Example: Local Community Associations

• Labor, Agricultural, and Horticultural Organizations.
  Example: Trade Unions, Farm Bureaus

• Business Leagues, Chambers of Commerce, and Real Estate Boards.
  Example: U.S. Chamber of Commerce

• Social and Recreational Clubs.
  Example: Fraternities, Country Clubs, Hobby Clubs

Non-Exempt Organizations

• Political Organizations

• Certain Types of Clubs: Clubs that discriminate in their membership policies on the basis of race, color, or religion may not qualify for tax-exempt status.

• Feeder Organizations: These organizations conduct regular business activities, such as running a store or a restaurant, and use the profits to support a tax-exempt organization.

• Professional Sports Leagues

Tax-Exempt Organizations: Formation

Form of Organization: Trust or Corporation.

Written Application

Timelines for Application: An organization should apply for tax-exempt status within 15 months from the end of the month in which it was organized.

Tax-Exempt Operational Activities

Public Charities

Public charities are non-profit organizations that typically receive a large portion of their revenue from the general public or the government.

They receive at least one-third of their financial support from small donors, grants from other public charities, or governmental units.

Private Charities (Private Foundations)

Private foundations, sometimes referred to as non-operating foundations, receive most of their income from a small number of donors or sources, such as a single individual, family, or corporation.

They receive less than one-third of their financial support from the general public.