LLCs and Nonprofit Organizations - For-Profits, Nonprofits, and Hybrids

By Keatinge, Robert R. | Suffolk University Law Review, Summer 2009 | Go to article overview

LLCs and Nonprofit Organizations - For-Profits, Nonprofits, and Hybrids


Keatinge, Robert R., Suffolk University Law Review


"There is no reason why good cannot triumph as often as evil. The triumph of anything is a matter of organization. If there are such things as angels, I hope that they are organized along the lines of the Mafia."

Kurt Vonnegut, THE SIRENS OF TITAN (1959).

INTRODUCTION

  I. NONPROFIT ORGANIZATIONS
     A. General Concepts
     B. UBTI
 II. THE EFFECT OF MEMBERSHIP IN AN LLC ON THE
     EXEMPTION OF THE EXEMPT ORGANIZATION
     A. General Background
     B. Revenue Rulings 98-15 and 2004-51
III. LLCS AS EXEMPT ORGANIZATIONS
 IV. HYBRID ORGANIZATIONS
     A. B Corporations
     B. L3Cs
     C. Other LLCs as Hybrid Organizations
  V. DRAFTING CONSIDERATIONS IN ESTABLISHING
     A NONPROFIT OR HYBRID LLC
CONCLUSION

INTRODUCTION

The acceptance of the limited liability company (LLC) in 1998 afforded business owners and their advisors with a more straight-forward and flexible way of doing business than was available at that time. Two decades ago, there were two organizational forms under which business owners could obtain pass through taxation without vicarious liability for the obligations of the organization--the S corporation and the limited partnership with a corporate general partner. (2) The LLC eliminated some of the limitations attendant to each of these forms. Unlike the S corporation, the LLC has no limitation on the number and types of owners, the inability to have special allocations and other sorts of economic relationships, and the necessity to comply with state-law corporate strictures. Unlike a limited partnership with a corporate general partner, the LLC does not require the maintenance of two organizations, and unlike limited partners, members of an LLC are not subject to potential vicarious liability for participation in management or control of the organization. (3) In some respects it is remarkable that the simplicity and efficiency of the LLC would only come into existence after decades of increasing complexity in both corporate and unincorporated worlds. As Lord Buckley has put it, "it was so simple it evaded me." (4)

Had the LLC merely provided these benefits, it would have been a useful addition to the arsenal of legal entities available to the business community. But the LLC's flexibility and efficiency has been the occasion for rethinking many other aspects of organizational structures. Two of the most significant are the single-member LLC, discussed by Carter Bishop elsewhere in this journal, (5) and the elimination of the requirement that an unincorporated business organization be organized for profit. One result of this reconsideration of business entities is a reconsideration of the form and structure of organizations that are explicitly not organized to realize an economic profit (nonprofits) and the advent of new forms and structures designed to combine economic returns with non-economic objectives (hybrids). This article considers this aspect of the development of LLCs.

This article deals with the LLC in the context of nonprofit organizations, (6) both as a legal entity in which a nonprofit organization may be a member and as an organization that may, itself, be organized as a nonprofit organization, or a hybrid organization--one that may be organized for a purpose that is neither exclusively for-profit nor exclusively nonprofit. Most legal organizations are created pursuant to a state law, referred to in this article as an "organic statute." (7) Unlike partnerships (8) and business corporations under the Model Business Corporation Act, (9) LLCs (and, more recently, limited partnerships) do not need to be organized for profit. (10)

The rules applicable to most business organizations under the organic statutes under which they are created may be supplemented through documents (referred to herein as "organic documents") created by those organizing the organization, the organization's owners, or the managers of the organization. …

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