LLC vs. Nonprofit: Everything You Need to Know

For every entrepreneur, it’s crucial to understand the different business structures before starting a business. This helps you pick the one that’s ideal for your business’s purpose and objectives.

This post compares two of the most popular structures: LLC and Nonprofit. It also provides a detailed LLC vs. Nonprofit comparison.

Each of these two business structures is guided by different legal and tax regulations, both at the state and federal levels.

By the end of this post, you’ll learn how each structure operates and how they differ from each other.

For instance, there are differences in the registration of LLCs vs. Nonprofits, how each handles assets during dissolution, and more.

Let’s get started!

What is an LLC?

A Limited Liability Company (LLC) is a hybrid company structure that operates similarly to a Corporation, Partnership, and Sole Proprietorship all at once.

It combines some of the best features of each structure, such as limited liability, pass-through taxation, and single-member ownership.

LLCs are directed by state laws and regulations that business owners need to know before formation. That is unless, of course, you get help from LLC formation services, in which case they’ll take care of everything on your behalf.

What is a Nonprofit?

A Nonprofit organization is a tax-exempt organization created to further the common good of society in the fields of science, education, religion, and more.

They are not built to make profits, unlike other businesses. As such, Nonprofits enjoy some tax exemptions from state, federal, and local authorities, unlike LLCs.

Nonprofit organizations mostly take the form of Corporations as far as their structure goes but with some significant differences in operation. They can also take the form of LLCs in some states.

LLC Vs. Nonprofit: Similarities and Differences

This section discusses the similarities and differences between LLCs and Nonprofit organizations in detail

Differences

The amount of paperwork and regulations that go into forming an LLC vs. a Nonprofit differs. Here’s a summary of the differences between these two structures.

Similarities

Here are some similarities between LLCs and Nonprofit organizations.

• Limited Liability: The same limited liability protection afforded to for-profit businesses like LLCs also applies to Nonprofit Corporations. This means that a Nonprofit organization’s directors, members, workers, or other similarly positioned officials are exempt from personal liability for the organization’s debts.
• Tax Benefits: Both LLCs and Nonprofit organizations enjoy tax benefits. An LLC will enjoy pass-through taxation, unlike other forms of businesses like Corporations.

Nonprofit organizations, on the other hand, are eligible for a wide variety of tax breaks. They can also receive funding from both the government and private institutions.

Advantages and Disadvantages of an LLC

LLC is a popular business structure among entrepreneurs as it provides the benefit of Corporations, Partnerships, and Sole Proprietorships. However, just like every other structure, LLCs have their advantages and disadvantages.

Advantages

Here are some advantages of choosing this structure for your business entity.

• Liability Protection: Since an LLC is legally considered a separate entity, this protects its members from personal financial loss. The personal assets of members cannot be taken to pay the business debts and a member’s liability is capped at the value of their initial investment.
• Pass-through taxation: Limited Liability Companies operate as pass-through entities. This means that the profits, losses, deductions, and gains of the company pass through to its member(s) in their ownership proportions.

They then report these taxes as part of their individual tax returns.

• Flexible management structure: Members of an LLC can choose how to manage their business. This includes whether they want to manage it themselves or choose managers to do it on their behalf.

This makes LLCs a suitable structure for a few business owners who want to run a business together or for many owners who live far apart.

Disadvantages

• Attracting Investors: It can be more difficult to attract investors with an LLC as opposed to structures like Corporations, for instance. Everything about S-Corps and C-Corps is more favorable for investors, from the way they are taxed to the way they interact with shareholders, unlike LLCs.

However, this is only relevant if you’re looking to build a large enterprise and may not be as important for small businesses.

• Filing and Renewal Fees: LLCs in most states require filing fees during registration and consequent renewal fees every other year. These fees could be high depending on the state where your business was formed. 
• Transfer of Ownership: Unlike Corporations, LLCs make it more difficult to transfer ownership interest. Adding new members to an LLC or changing the ownership percentages of current members typically requires the approval of all members.

Advantages and Disadvantages of a Nonprofit

Nonprofit organizations mostly take the structure of a Corporation. However, they have some significant traits that differ from for-profit Corporations.

Here are some advantages and disadvantages of starting a nonprofit business.

Advantages

• Exemptions from Federal Taxes: This is one of the biggest advantages of starting a Nonprofit organization. By being tax-exempt, Nonprofits can retain more finances and use them for the greater good.
• Funding From Both Public and Private Sources: Nonprofits can raise capital by applying for grants from public and private institutions as well as receiving donations from willing contributors. They also get discounts for products from Corporations looking to give back to society.
• Goodwill: Nonprofits fill a unique position in society that attracts goodwill from individuals. This helps them acquire resources that may not come easily for profit-making businesses.

Disadvantages

• No Ownership: Being a founder of a Nonprofit organization gives you minimal benefits. First, you can’t be the owner, meaning you may not get the upper hand in decision-making as you would other business entities.
• Limitations on Business Activities: To retain their tax-exempt status, Nonprofit Corporations have to follow some restrictive guidelines, such as not being able to participate in political activities.
• Disclosure requirements: Nonprofits have no privacy in the way they handle their finances as they are required to share their financial reports publicly.
• Inability to revert to private ownership: Even if the value of a Nonprofit organization increases, the members are not allowed to recoup these benefits.

So it may not be the best form of business if you’re building value in the form of assets, etc. Once your investment goes in, its benefits may never come back to you.

• Strict Ongoing Compliance Requirements: Nonprofit Corporations can still lose their tax exemption benefits if they fail to follow the compliance requirements. This includes failure to file annual returns with the IRS, engaging in restricted activities, etc.

Things to Consider Before Starting a Nonprofit

Nonprofit organizations can take different structures, the most common one being a Corporation.

Most states require Nonprofit organizations to operate as Corporations. However, some states like California and Michigan allow for Nonprofit Limited Liability Company registration.

Although Limited Liability Companies (LLCs) do not have tax-exempt status, a Nonprofit that operates as an LLC typically does, provided the LLC chooses to be classified as a Corporation for tax purposes.

Some states go a step further to request a statement of intent from Nonprofits that choose to be structured as LLCs.

If a Nonprofit organization takes the incorporation route, it must follow all the rules applicable to Corporations in their chosen state. Some of these rules are:

• Have a board of directors in place.
• File Articles of Incorporation with the state Secretary of State.
• Draft company bylaws.

The only difference will be that the Corporation will apply for tax-exempt status and won’t have to pay state and federal income taxes, and in most states, sales taxes as well.

To become tax-exempt organizations, nonprofit businesses need to fill out Form 501(c)(3) with the Internal Revenue Service (IRS).

It’s worth noting that to receive federal tax exemptions from the IRS, an LLC must have members that are all Nonprofit organizations in their own right.

For instance, if four different 501(c)(3) organizations decide to form a Nonprofit LLC, that entity will be free from federal income taxation.

Sounds too complex? Applying for a 501(c)(3) federal tax-exempt status can be difficult and time-consuming. Luckily, business formation services like Incfile or LegalZoom can help you start your Nonprofit hassle-free.

How to Incorporate a Nonprofit

Here’s a brief step-by-step guide on how to form a Nonprofit if you want it to be treated as a Corporation.

Step 1: Choose your company name and make sure it’s not already taken by conducting a business name search.

Step 2: Draft and submit Articles of Incorporation to the proper authorities. If you don’t know where to begin with this, you can get a customizable draft from Inc Authority or ZenBusiness.

Step 3: Create company bylaws that will govern your company’s daily operations. This step is optional, but highly recommended. In fact, most business formation services like Incfile, ZenBusines, or LegalZoom include a draft of company bylaws as part of their paid packages.

Step 4: Hold your first meeting where you’ll appoint your trustees or board of directors and formally present your bylaws. During this meeting, you’ll discuss your annual budget and fundraising strategy and make important business decisions. You’ll also need to record the minutes of the meeting.

Step 5: Get an EIN (Employer Identification Number) as required by the IRS for tax purposes. You can either apply for one on the IRS website or seek the help of business formation services like Incfile or any other Incfile alternatives, for a fee.

Step 6: Apply for tax exemption. Your Nonprofit Corporation will be required to pay all applicable taxes (federal, state, and local) until it is granted tax-exempt status by the IRS.

Differences Between Nonprofit and For-Profit Corporations

While most Nonprofits take the structure of a Corporation, there are significant differences between them and Corporations that are built to make profits.

Here are a few key differences.

Tools to Help You Form Your LLC or Nonprofit Organization

Starting an LLC or a Nonprofit organization can be daunting, especially if you’re a beginner with little to no knowledge of the process.

Luckily, there are numerous business formation services in the market that can help you with that. They also provide services to help get your business off the ground.

These include drafting an LLC Operating Agreement or Corporate Bylaws, applying for EIN, compliance reminders, tax consultation, and more.

Here’s a quick overview of some of the best LLC services to help form your LLC or Nonprofit business.

1. Incfile

Image via Incfile

Best for entrepreneurs looking for affordable formation services.

Incfile offers business formation services for LLCs, Nonprofit organizations, and other business entities. It was formed in 2004 and has since helped form over 1million businesses. You can read more about it in this detailed Incfile review.

2. Inc Authority

Image via Inc Authority

Best for business formation and growth packages.

Inc Authority is best known for its free LLC formation services and excellent customer reviews.

The platform also offers other business growth services like business funding and trademarks. Read more on this solution here.

3. LegalZoom

Image via LegalZoom

Best for businesses that need ongoing legal services.

This is another one of the most popular online business formation tools that has been in business for over 20 years.

The platform has aided in the formation of over 2 million businesses since its formation. If you find that LegalZoom is not ideal for your business formation needs, you can consider some LegalZoom alternatives.

4. ZenBusiness

Image via ZenBusiness

Best for businesses looking for popular LLC formation services.

This LLC formation service provider helps businesses get started for free and provides additional services to help them run smoothly.

However, if you’re looking to form a Nonprofit, you may want to consider LegalZoom. Here’s a ZenBusiness vs. LegalZoom comparison showing services provided by each platform.

Frequently Asked Questions

Q1. What are the benefits of an LLC over a Nonprofit?

A. Some of the benefits of starting an LLC over a Nonprofit include:

• You’ll be able to make profits and recoup on any investments in an LLC as opposed to a Nonprofit.
• Ownership in an LLC comes with several benefits, such as more power in decision-making.
• In the case of LLCs, there is no public scrutiny involved, and businesses have the freedom to make any financial decisions without being accountable to the public.

Q2. Are most Nonprofits LLCs or Corporations?

A. Most Nonprofit organizations take the form of Corporations as opposed to LLCs. As such, they have to follow state laws for Corporations.

However, some states like California allow for Nonprofits to be LLCs. In this case, they’re guided by state LLC laws.

Q3. What is the difference between a Nonprofit and a Limited Liability Company?

A. Some differences between a Nonprofit and an LLC include:

• LLCs are formed to make profits while Nonprofits are formed for the good of the public. Some examples of Nonprofit organizations include religious foundations, schools, research centers, etc.
• Forming Nonprofit organizations involves a lot more paperwork than forming LLCs.
• Nonprofits are not owned by any individuals but are instead run by a board of directors. LLCs are owned and run by members.
• Nonprofits are exempt from paying federal and state income taxes while LLCs are subject to pass-through income taxation.
• If an LLC gets dissolved, assets are shared among the owners. With Nonprofits, the assets are transferred to other charities, NGOs, or government bodies for public use.

Q4. What is the best business structure for a Nonprofit?

A. It’s more convenient to structure your Nonprofit as a C-Corporation. This is because structures like LLCs can be limited by certain state laws.

In fact, some states do not allow for the formation of Nonprofit LLCs, which can be an additional hurdle. You’ll also face some difficulties trying to acquire tax-exempt status for a Nonprofit LLC.

Q5. Where do Nonprofits get the most money?

A. Here are some of the top ways Nonprofits get their funding:

• Donations
• Grants
• Corporate sponsorships
• Membership fees
• Selling goods and services

LLC vs. Nonprofit: Wrap-Up

It’s important to choose a business entity that protects your assets and aligns with your long-term objectives. If you want to create value and reap financial rewards, then an LLC may be the better option for you.

However, if you’re looking to build a business dedicated to serving the public, then you can choose a Nonprofit Corporation. Be sure to check the state regulations before registering your business anywhere in the US.

Having trouble with business formation in general? Here are a few business formation services you could explore.
 
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