An NFP with a noncontrolling interest in an LLC must determine whether to account for the investment using the equity method or the guidance in ASC 321 (see NP 9.7). Instead of focusing on governance and decision-making rights (as is required for the consolidation evaluation), selection of the appropriate model focuses on how the LLC determines its members’ interests in its underlying net assets—i.e., how it would distribute its equity to the members.

Many LLCs maintain individual capital accounts that track members’ cumulative investments, participation in profits and losses, and distributions in a manner similar to partnership capital accounts. In other LLCs, the operating agreement attaches voting rights, participation in profits and losses, and entitlement to equity to units in a pro-rata fashion so that economically, the rights associated with any one unit are indistinguishable from another (similar to the rights associated with common stock). In those cases, a member’s equity is determined based on the number of units it holds relative to other members. (This would not include situations when “units” are used as a bookkeeping mechanism to facilitate allocations of profits and losses among members.)

ASC 958-810-15-4(d) directs NFPs to apply the guidance in ASC 323-30-35-3 to determine whether noncontrolling interests should be accounted for using the limited partnership model described in NP 9.8.3 or the corporation model described in NP 9.7.2 and NP 9.7.3. According to that guidance, the model for limited partnerships is used if individual capital accounts are maintained; otherwise, the model for corporations is used.

Because this evaluation considers a different attribute of the LLC’s structure, an LLC that is viewed as similar to a corporation when evaluating consolidation might be viewed as similar to a limited partnership for purposes of the equity method evaluation. Example NP 9-2 illustrates such a situation.

EXAMPLE NP 9-2
Evaluating consolidation of an LLC shared services entity

Shared Services Entity (SSE) is a nonprofit LLC with four members, all of which are 501(c)(3) tax-exempt organizations. SSE is organized exclusively for tax-exempt purposes and operates exclusively to further the charitable, educational, or scientific purposes of its members. Note that because the LLC provides its members with ownership interests, it does not meet the definition of an NFP entity for accounting purposes, even though its purpose is to carry out a nonprofit activity. See related discussion at NP 5.2.

According to the operating agreement, the responsibility for SSE’s governance, oversight, and management is vested in a board comprised of the members. Decisions of the board are legally binding (that is, the board is not merely advisory in nature.) The operating agreement also stipulates each member’s “participation percentage” for purposes of voting and distribution of profits or losses (which are 40%, 30%, 20%, and 10%, respectively). Each member has a capital account that rolls forward its cumulative investments, participation in profits and losses, and distributions received.

How should SSE’s members account for their interests?

Each member would first consider whether its interest requires consolidation. When evaluating consolidation, the members would use the model described in NP 9.7.1 (for entities other than limited partnerships). SSE has no “managing member” who possesses exclusive decision-making responsibility. Instead, all members participate in decision-making through the board of members, with voting rights that are proportional to their participation percentages. In this fact pattern, none of the members has a controlling financial interest that would require consolidation, as no single member has a participation percentage of over 50%.

Next, each member would evaluate whether the equity method of accounting or the guidance in ASC 321 should be applied. Because SSE maintains separate capital accounts for each member (similar to a partnership capital account), the model for noncontrolling interests in limited partnerships would be used. Because SSE is not engaged in real estate activities, its members are not required to apply the model in ASC 970-323 for real estate limited partnerships but may apply that model by analogy. If a member chooses to analogize, the equity method would generally be applied, as its members all participate in management (that is, SSE has no non-managing members).

Question NP 9-6 illustrates the analysis for an interest in a real estate LLC that has member capital accounts similar to a partnership.

Because Real Estate LLC maintains separate capital accounts for each member (similar to partnership capital accounts) the non-managing members are required to evaluate the investment in the LLC as a limited partnership.