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Governor Vetoed Bill Giving LLCs the Tax Exemptions of 501(c)(3)s

LLCs are companies authorized by New Mexico law which bear some of the characteristics of a corporation. An individual or group can create a LLC under New Mexico law and deem himself, herself or itself – in the event it is a corporation or association - as the sole member. This gives that individual the opportunity to operate a business in the form of a LLC. One advantage to the member is that any liability incurred by the LLC would be the responsibility of the LLC not the member. But the tax liability of the LLC does pass on to its member (if there is only one) or members (proportionately to the extent of their equity share in the LLC).

Now 501(c)(3) organizations can qualify for tax-exempt status because they are non-profit organizations. The organization must be dedicated to the following purposes:charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals.

In the New Mexico legislature, Senate Bill 117 was introduced this term to allow LLCs whose sole member is a 501(c)(3) organization to itself enjoy the tax exemption already enjoyed by its member. The Governor decided to veto the bill on the ground that some activities of such organization are not necessarily tax-exempt. As stated in her letter explaining the veto, the Governor pointed out that, “Treating an LLC as a 501(c)(3) when its sole member is a 501(c)(3) is good policy only if the LLC is a “disregarded entity” because, in that situation, all of the LLC’s income would flow down to the 501(c)(3) sole member.”  According to the IRS, "If a “disregarded entity” is owned by an individual, it is treated as a sole proprietor. If the “disregarded entity” is owned any other entity, it is treated as a branch or division of its owner."

Mr. Giddens and the other attorneys at Giddens & Gatton Law, P.C. have experience advising New Mexico business owners as to which corporate entity will best serve their company’s needs. Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico. Call the office at (505) 633-6298 to set up an appointment or visit the firm’s website at for more information      

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