Limited liability

Article Dean Dorton

The Kentucky General Assembly recently passed legislation, in effect August 1, 2016, to exempt disregarded single-member limited liability companies wholly-owned by IRC 501(c)(3) organizations from Kentucky sales and use tax on their purchases.

Prior to this legislation, issues arose as Kentucky required these disregarded entities to establish their own IRC 501(c)(3) exemption separate from their sole owner, which is not required, nor allowed, under Federal income tax law.

Kentucky now requires disregarded single-member limited liability companies wholly-owned by IRC 501(c)(3) organizations to apply for exempt status with Kentucky using Form 51A125 and attach documentation supporting the organization as a disregarded entity of the parent organization, along with the parent organization’s exempt status determination letter from the IRS or other proof of its exemption. These LLCs will obtain their own Kentucky exemption number separate from their sole owner.

It is becoming more frequent for tax exempt entities to use wholly owned LLCs to hold either property or separate operations from the parent organization.

This can be beneficial in providing liability protection for the parent organization. If you have any questions regarding sales tax exemption for nonprofit LLCs, please contact your Dean Dorton advisor or Allison Carter at 859-425-7645 or alcarter@deandortonstg.wpenginepowered.com.

Article Dean Dorton

Many tax exempts face the difficult task of trying to raise enough capital to fund programs, without the risk of losing exempt status, when traditional lending opportunities are increasingly less available. Joint venturing with for-profit corporations has been one strategy used. However, such partnerships could put exempt status at risk if too much control is retained by the for-profit co-venturer.

IRS has upheld that a joint venture with a 50/50 allocation of control between the exempt and for-profit partners, with other safeguards, could be a valid arrangement. These safeguards are: a partnership document that contains a charitable purpose, effective control over day-to-day operations and major decisions retained by the non-profit, a charitable override for a deadlocked board, absence of profit maximization as a primary motive, and the governing documents containing written commitment to fulfilling the charitable purpose if there is a conflict with profit maximization. The problem lies in whether the for-profit corporation will agree to these terms.

Another solution would be for the exempt organization to form a partnership with a Benefit Corporation (B-corp) or a low profit limited liability company (L3C), which are for-profit entities whose missions include promotion of social good. Those tasked with governance of these types of entities make decisions based on profitability and impact on other stakeholders, including the community at large and the social good. These entities’ interests are more closely aligned with the non-profit organization’s mission than that of a for-profit corporation. If designed correctly, a partnership with the B-corp or L3C is a way to effectively structure a joint venture that will benefit both organizations and help preserve the exempt status of the non-profit. While B-corps and L3Cs cannot currently be formed in Kentucky, they may be formed elsewhere and operated in Kentucky.

If you have questions about structuring your joint ventures, please contact Allison Carter at alcarter@deandortonstg.wpenginepowered.com or 859-425-7645.