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!
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.
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.
This section discusses the similarities and differences between LLCs and Nonprofit organizations in detail
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.
LLC | Nonprofit | |
Formation Process | You can form and operate your LLC in the state of your choice with minimal effort, restrictions, and paperwork. | There’s more paperwork involved during registration and more restrictions on how your Nonprofit should operate. |
Economic Motivation | A Limited Liability Company (LLC) is formed to make a profit for its members. | Although a Nonprofit can sell goods and services to generate revenue, its primary goal is to serve the public good. |
Ownership | LLCs are run by members (who are also the owners) who share company profits and losses. | Nonprofit organizations are run by a board of directors and are not owned by individual founders or directors. |
Taxation | LLCs have to pay state and federal income taxes but can be eligible for some tax breaks. | Nonprofit organizations are mostly tax-exempt from federal income taxes and some state taxes. |
Insolvency | If an LLC gets dissolved, the assets are divided among the members. | Any assets left get distributed to other Nonprofits or the state, local, or federal govt. for public use. |
Here are some similarities between LLCs and Nonprofit organizations.
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.
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.
Here are some advantages of choosing this structure for your business entity.
They then report these taxes as part of their individual tax returns.
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.
However, this is only relevant if you’re looking to build a large enterprise and may not be as important for small businesses.
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.
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.
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:
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.
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.
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.
Nonprofit Corporations | For-profit Corporations | |
Ownership | They are built to help the public and therefore can’t have individual owners. | They are built to make profits and therefore have individual owners. |
Dissolution | Assets are transferred to other institutions serving the public. | Assets can be divided among shareholders. |
Tax Exemptions | They’re exempt from some or all state or federal income taxes. | They are subject to double taxation, once at the federal level and once at the state level. |
Profits | Must reinvest profits back into the business. | Can share profit among shareholders. |
Limitations on Activities | Can only carry out the tasks mentioned in the federal tax exemption regulations to retain its tax-exempt status. | Minimal limitations on business activities. |
Public Inspection | Their finances and activities are open to public scrutiny. | Their finances are private unless their shares are listed to be traded in the stock markets. |
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.
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.
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.
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.
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.
Q1. What are the benefits of an LLC over a Nonprofit?
A. Some of the benefits of starting an LLC over a Nonprofit include:
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:
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:
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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