FAQs on the SMLLC - Part 2
By Nathan Camp
As more and more Pastors and Ministry Leaders engage in the benefits of starting a Single Member Limited Liability Company (SMLLC) for their church or ministry, there is a rise in questions and a need for empowering knowledge around the subject. Here is part 2 of 2 blogs on the most frequently asked questions about the SMLLC.
Frequently Asked Questions - Part 2
1. Can a church use an SMLLC to hold title to property?
Yes, a church can use an SMLLC to hold title to property, such as real estate or vehicles, which can help protect the church's assets from potential liabilities associated with the property.
2. How does a church maintain control over the SMLLC?
As the sole member of the SMLLC, the church maintains control by appointing a manager (usually the pastor of the church or executive director of the ministry), by appointing a management team to oversee the SMLLC's operations, or by managing the SMLLC directly through its governing body, such as the Board of Directors/Elders or Trustees. A well written operating agreement should provide the flexibility you need to setup a management structure that works for you.
3. Can a church use an SMLLC for revenue-generating activities?
Yes, a church can use an SMLLC for revenue-generating activities as long as they are consistent with the church's religious, educational, and charitable purposes and comply with Section 501(c)(3) requirements. Some good examples are
- Church bookstores and cafes,
- Daycare centers,
- Book print shops,
- Preaching and teaching materials produced and sold online or in physical form,
- Conference and event hosting: A non-profit could use its SMLLC to organize and host conferences, workshops, or other events that are in line with its mission and generate revenue through ticket sales, sponsorships, or vendor fees,
- Fundraising events: The SMLLC could manage special fundraising events, such as charity auctions, benefit concerts, or charity races, with proceeds supporting the non- profit's exempt purposes,
- Fee-based educational programs: The SMLLC could oversee fee-based educational programs, such as seminars, workshops, or training courses, that further the non-profit's mission,
- Thrift stores or donation centers: The SMLLC could operate thrift stores or donation centers, selling donated goods and using the profits to support the non-profit's programs and services.
4. Can a church form multiple SMLLCs for different purposes?
Yes, a church can form multiple SMLLCs for various purposes, such as operating separate programs, initiatives, or business ventures, as long as each SMLLC aligns with the church's purposes and complies with applicable regulations.
5. How long does it take to form an SMLLC?
The time it takes to form an SMLLC can vary depending on the state and the processing time for the required documents. With the StartRIGHT service, you can expect the process to be completed in within three weeks. This includes drafting and filing the Articles of Organization, obtaining state approval, and creating the Operating Agreement, more appropriately known as the Employer Identification Number and drafting resolutions.
6. How does a church transfer assets to an SMLLC?
Transferring assets, such as real property, from a church to its SMLLC typically involves drafting and executing appropriate legal documents such as warranty deeds or quit claim deeds. For personal property, the church can do so through bills of sale, assignment agreements, or gift agreements. It is important to consult with an attorney experienced in nonprofit and SMLLC law to ensure the proper transfer of assets and compliance with relevant regulations.
7. Can a church-owned SMLLC have employees?
Yes, an SMLLC owned by a church can have employees. The SMLLC, as a separate legal entity, can hire and manage employees independently. It is important to comply with all applicable federal, state, and local employment laws and regulations when hiring and managing employees in an SMLLC.
8. Can a church's SMLLC apply for grants or accept donations?
Yes, a church's SMLLC can apply for grants and accept donations, as long as the SMLLC is considered a disregarded entity for tax purposes and shares the church's 501(c)(3) tax-exempt status. Donors can claim tax deductions for their contributions to the SMLLC, just as they would for donations made directly to the church.
For example: Church ABC formed an SMLLC to operate a K-12 school as part of its religious and educational mission. The SMLLC, known as ABC School, applied for and received a state-funded grant to support its programs and services. Donors who contribute to ABC School can claim tax deductions for their donations, as ABC School is treated as a disregarded entity for tax purposes and shares the same 501(c)(3) status as the church.
IRS Notice 2012-52 provides guidance on the tax treatment of contributions to single-member limited liability companies (SMLLCs) that are wholly owned and controlled by a U.S. tax-exempt organization and are disregarded as separate from their owner for federal tax purposes.
According to Notice 2012-52:
- A contribution to a domestic SMLLC that is wholly owned and controlled by a U.S. charity (described in section 170(c)(2)) and is treated as a disregarded entity for federal tax purposes is treated as a charitable contribution to the U.S. charity for purposes of section 170.
- The contribution is deductible for federal income tax purposes if it meets the substantiation requirements under section 170(f).
This notice essentially confirms that if a donor makes a contribution to an SMLLC wholly owned by a tax-exempt organization (such as a church), and the SMLLC is treated as a disregarded entity for federal tax purposes, the contribution will be treated as if it was made directly to the tax-exempt organization and can be considered tax-deductible under section 170. You can find the full text of IRS Notice 2012-52 here.
9. Can a church's SMLLC enter into contracts and agreements?
Yes, a church's SMLLC can enter into contracts and agreements as a separate legal entity. This includes leases, service agreements, and other contractual arrangements. It is crucial to ensure that any contracts entered into by the SMLLC are in line with the church's tax-exempt purposes and do not create unrelated business income.
10. How does a church dissolve an SMLLC?
To dissolve an SMLLC, the church must follow the dissolution procedures outlined in the SMLLC's Operating Agreement and comply with the relevant state laws. This may include filing a Certificate of Dissolution or similar document with the state, notifying creditors, and distributing any remaining assets according to the SMLLC's Operating Agreement and applicable laws.
11. How does a church maintain proper governance and oversight of its SMLLC?
Maintaining proper governance and oversight of a church-owned SMLLC involves regular communication between the church's board and the SMLLC's management, as well as ensuring that the SMLLC operates in accordance with the church's tax-exempt purposes. The church's board should periodically review the SMLLC's financial statements, activities, and compliance with applicable laws and regulations.
12. Can a church-owned SMLLC own or lease property?
A church-owned SMLLC can own or lease property as a separate legal entity. Owning or leasing property through an SMLLC can provide an additional layer of liability protection for the church, as the SMLLC's debts and liabilities are separate from the church's assets.
Keep in mind that if the SMLLC leases out a building, the same unrelated business income tax rules apply. If the building is owned without any debt, the lease payments received are generally tax-free and need not be reported on Form 990-T. However, if the building is debt-financed, then the lease payments received, if more than $1,000.00, are treated as taxable and must be reported on Form 990-T.
13. Can a church's SMLLC engage in lobbying or political activities?
A church's SMLLC must adhere to the same restrictions on lobbying and political activities as the church itself under Section 501(c)(3) of the Internal Revenue Code. This means that the SMLLC cannot engage in substantial lobbying activities or participate in any political campaign on behalf of or in opposition to any candidate for public office. Failure to comply with these restrictions could jeopardize the church's tax-exempt status.
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.
* Currently, our SMLLC Program is only available in CO, GA, TX, and FL.