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  • Marlene

Nonprofit LLCs And Benefit Companies

Welcome to our second installment of Business with a Mission. We are aiming to build a series of posts detailing some of the different business entities/models used to advance positive change in the world. Today's blog post will look at the new addition of both Benefit LLCs and Nonprofit LLCs to Pennsylvania's business law.

On November 21, 2016, House Bill 1398 was signed into law as Act 170. Act 170 is a comprehensive revision of PA law on partnerships and LLCs. The new law takes effect generally on February 21, 2017. The Act amends Title 15, Corporations and Unincorporated Associations, and completely replaces the existing laws on partnerships, limited partnerships and limited liability companies by adding three new sections known as the Uniform Partnership Act, the Uniform Limited Partnership Act and the Uniform Limited Liability Act. Although there are several important changes made in Act 170, this post will only focus on the changes for Nonprofit LLCs and Benefit Companies, be sure to check out Act 170 to see all of the changes. 

Nonprofit LLCs

Previous to the new amendments made by Act 170, an LLC could be recognized by the IRS as tax-exempt for federal income tax purposes, but that did not necessarily mean that it would be recognized as exempt from state income taxes or state property taxes.

Now, due to the changes made by Act 170- The allowed purposes for limited liability companies have also been altered to include purposes that are not-for-profit. The exact non-profit purpose will need to be defined in the entity’s public filing, however these purposes are now permissible under Pennsylvania Law which previously only allowed for non-profit corporations. This means that nonprofit limited liability companies will be permitted to receive and hold real property in trust for the purpose or purposes set forth in its public filing.

A nonprofit may want to establish and own an LLC for various reasons including: protections from risks and liabilities associated with its assets and activities of the LLC especially with ownership of of real property, and to operate a business that is not substantially related to advancing its exempt purpose without exposing itself to revocation of its 501(c)(3) exempt status. This strategy is commonly employed where a nonprofit desires to carry on an unrelated business that is substantial in scope and size. In this case, the LLC will not be tax-exempt or to operate a joint venture with one or more other entities. The LLC housing the joint venture may be tax-exempt if all of its members are tax-exempt or taxable if its members consist of both nonprofit and for-profit organizations.

Benefit Companies

In addition to Nonprofit LLCs, Act 170 creates “Benefit Companies”, or also known as a “Benefit LLC”. A Benefit Company is an entity whose purpose must, at minimum, be for the general public benefit and may be for a specific public benefit meaning is must have “a material positive impact on society and the environment, taken as a whole and assessed against a third-party standard, from the business and operations of a benefit company”.

Benefit Companies will be more transparent than other entities, as a third-party standard must be held and maintained by the entity and such reports and assessments confirming the third-party standard will be made publicly available.

Members, managers, and officers (if they have the authority or discretion to do so), when discharging their duties under Pennsylvania law or the company’s operating agreement shall consider their impact on their employees, community, the environment, the short and long term interests of the company, and the ability to accomplish the company’s general public benefit purpose.

Members are not personally liable for any failure of a benefit company to pursue or create a general public benefit furthermore the company cannot be liable for monetary damages. No person can bring an action against the company,members,managers, or officers with respect to failure to pursue or create a general public benefit or a violation of the benefit company law in Pennsylvania.                 

Like the Benefit status for corporations that offers immediate, tangible benefits by protecting the ownership of the company from shareholders suits, the value of becoming a Benefit Company is similarly tangible. The benefit designation also offers an opportunity for a sustainable business to differentiate itself and to boost its credibility in an increasingly crowded sustainable marketplace.

If you are interested in learning more about Nonprofit LLCs,Benefit Companies, or forming your own entity please contact us at       

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