Churches, Ministries and the SMLLC
By Nathan Camp
Pastor Jenkins always loved having a soup kitchen. From the outset of starting his church, he ensured they were feeding the community. It was core to his vision, and the community had always been receptive and thankful for this outreach. So, when an attorney called him because his client had slipped at the soup kitchen and was suing for more than it cost to run the soup kitchen for a year, Pastor Jenkins was glad his church was protected through the establishment of their SMLLC. It was for moments like this that he set up his SMLLC to begin with.
Should Your Church Have an SMLLC?
More and more Pastors and Ministry Leaders are becoming familiar with Single Member Limited Liability Companies (SMLLCs). This corporate structure is very attractive to many pastors and ministry leaders for various reasons. We will release a series of blogs on SMLLCs to empower and educate our readers to decide whether an SMLLC should be a part of their church strategy.
What is an SMLLC?
The first thing we need to do is answer the question, “What is an SMLLC?”
SMLLC stands for Single Member Limited Liability Companies. These corporate structures have gained popularity among nonprofit organizations for years, as they offer the flexibility of limited liability protection combined with the tax-exempt status granted under Section 501(c)(3) of the Internal Revenue Code.
The Beginnings of SMLLCs Owned by Section 501(c)(3) Organizations
The inception of SMLLCs owned by Section 501(c)(3) organizations can be traced back to a landmark announcement issued by the IRS in 1999.
It clarified that a domestic SMLLC, wholly owned by a Section 501(c)(3) organization and disregarded as separate from its owner for federal income tax purposes, would share the tax-exempt status of its parent organization.
The rationale behind this announcement was that the SMLLC's activities would be considered the activities of its sole member (the tax-exempt church or ministry), and, thus, subject to the same rules and regulations applicable to the parent organization.
What does “Disregarded” mean?
Let me better explain what it means to be a disregarded entity. When an SMLLC is considered a disregarded entity, the owner reports the SMLLC's income, expenses, assets, and liabilities on the tax return of the parent organization, such as a 501(c)(3) church or ministry.
It is important to note that while an SMLLC is disregarded for federal tax purposes, it is still considered a separate legal entity under state law, providing limited liability protection to its owner. The disregarded status only affects the way the SMLLC's financial activities are reported for tax purposes.
IRS's Current Position on SMLLCs Owned by Section 501(c)(3) Organizations
The IRS's current position on SMLLCs owned by Section 501(c)(3) organizations is outlined in various publications, revenue rulings, and revenue procedures, including:
Revenue Ruling 2018-15: This ruling (and Revenue Ruling 557) shows the process of filing for an SMLLC, and lends encouragement to many churches seeking to better protect its assets to form SMLLC’s.
Also, this procedure eliminates the requirement for a disregarded SMLLC owned by a Section 501(c)(3) organization to separately apply for tax-exempt status, provided that its parent organization (the church or ministry) has already obtained tax-exempt status. It streamlines the process for SMLLCs by treating them as part of their parent organizations.
IRS Notice 2012-52: This Notice offers insight into how the IRS recognizes the close relationship between the parent organization and the SMLLC when the latter is treated as a disregarded entity.
The IRS has progressively clarified its position on SMLLCs owned by organizations described in Section 501(c)(3), allowing these entities to share their parent organization's tax-exempt status and reducing the regulatory burden associated with obtaining and maintaining tax-exempt status. Key guidance on this topic can be found in IRS Notice 2012-52 and Revenue Procedure 2018-15. This clear guidance has paved the way for the increasing popularity of SMLLCs among nonprofit organizations, as they provide a flexible and advantageous legal and tax structure.
IRS Definition: “A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a "disregarded entity"). A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity."
The Benefits of SMLLCs
Limited Liability Protection: One of the primary benefits of an SMLLC is the limited liability protection it provides to its sole member (often a church or ministry). By creating an SMLLC, the parent organization can protect its assets from potential liabilities associated with specific projects or activities conducted by the SMLLC. This separation of assets and liabilities can help shield the parent organization from financial and legal risks.
Simplified Administration: As a disregarded entity for tax purposes, an SMLLC owned by a 501(c)(3) organization shares the tax-exempt status of its parent organization, as outlined in Revenue Ruling 2004-51 and Revenue Procedure 2018-15. Consequently, the SMLLC does not need to file a separate tax-exempt application or annual tax returns, thus simplifying the administrative burden on the parent organization.
Flexibility in Management: SMLLCs offer flexibility in terms of management and governance structure. The parent organization can appoint a board or an individual to manage the SMLLC, enabling a more focused and efficient approach to specific projects or activities. This flexibility can also help with collaborations, as the SMLLC can operate as a separate legal entity, making it easier to partner with other organizations or businesses.
SMLLCs can offer significant benefits to churches and ministries that have 501(c)(3) approval by providing limited liability protection, simplified administration, and flexibility in management. These advantages can support the efficient operation and growth of churches and ministries and help them achieve their mission and objectives.
If you believe an SMLLC is right for you or would like to know more about SMLLCs, please contact StartCHURCH today at 770-638-3444.
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