By , March 7, 2018 8:37 pm

Below in italics are the citation, title and author’s synopsis of a new law journal article about the use of single-member LLCs by non-profits.

52 Real Prop. Tr. & Est. L.J. 153

Real Property, Trust and Estate Law Journal

Fall, 2017

Ellen P. Aprill

Copyright © 2017 by American Bar Association; Ellen P. Aprill


Author’s Synopsis: Tax-exempt organizations, including section 501(c)(3) organizations and their donors, use single member limited liability companies (SMLLCs) for a variety of purposes. Exempt section 501(c)(3) nonprofit organizations–to be referred to as charities–that have a number of facilities, such as schools, hospitals, or real estate investments, may form a separate SMLLC for each of them, primarily to protect other assets from liability. Charities may wish to place an activity with a high risk of environmental or tort liability, such as an overnight summer camp, in its own SMLLC. SMLLCs may be used to isolate unrelated business activities from related activities or risky investments from more traditional ones. They may also be used to isolate risky investments from more conservative ones.

An SMLLC leads a schizophrenic existence. Although an entity under state law, it is disregarded for most purposes under federal tax law. Furthermore, the leading theoretical approaches to LLCs and to nonprofit organizations stand in sharp contrast to each other, particularly regarding the ability to rely on contract. These very different sets of applicable law and theory allow for regulatory arbitrage, which involves taking advantage of inconsistencies between the applicable rules.

LLCs, including SMLLCs, have the choice of being member-managed or manager-managed. To ensure the greatest liability protection, the member of an SMLCC may choose for it to be manager-managed. Some LLC statutes, most importantly Delaware’s statute, permit the SMLCC to waive fiduciary duties. Charities, however, cannot waive fiduciary duties. This divergence in applicable rules regarding fiduciary duties could lead to conflict between the member charity and its SMLCC, such as pursuing activities inconsistent with the charity’s exempt purpose or engaging in campaign intervention. To avoid such conflict, this Article recommends that the IRS issue *154 guidance requiring control of the SMLCC by the charity, as it has done in the context of charitable contributions to a charity’s SMLCC.

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