Is an LLC the right choice for your organization? Learn about the legal differences between an LLC and a nonprofit, and decide which one is best for you.
What Are the Differences Between an LLC and a Nonprofit?
LLCs and nonprofits are two separate legal structures with distinct benefits, rules, and processes. While not all states allow LLCs to be nonprofit organizations, some do recognize this structure and provide special tax exemptions. It is important to research the differences before deciding which one is right for your organization.
LLCs are for-profit entities which allow the owners to participate in business decision making, receive profits, and limit their personal liability. On the other hand, nonprofits are formed to serve a charitable purpose, such as promoting education or providing assistance to those in need. The owners of nonprofits do not generally receive profits or participate in decision making and may be personally liable for debts incurred by the organization. It is important to consider these differences before deciding which type of legal entity is best for your organization. When forming a new organization, one of the first decisions you must make is whether to form an LLC or a nonprofit. An LLC, or limited liability company, is a for-profit business structure which protects members from personal liability for debts incurred by the company. LLCs allow their owners to participate in decision making and receive profits from the operation of the business. On the other hand, nonprofits are formed with a charitable purpose such as providing educational services or assisting individuals in need. The members of nonprofits do not usually receive profits and they may be personally liable for debts incurred by the organization. Before deciding which type of legal entity is right for your organization, it’s important to understand the differences between an LLC and a nonprofit.
While an LLC and a nonprofit share some features, such as limited liability for the owners, they have significant differences. These differences make the choice between starting an LLC or nonprofit dependent on the type of operations being planned and whether the organization must pay taxes. If your goal is to create a business that earns profits for its owners, an LLC is likely the best option. On the other hand, if you want to operate a business in order to benefit society without making any profits or issues stock, becoming a nonprofit might be more appropriate.
How Is Governance Structured in Each Entity?
When comparing LLC and nonprofit status, there are important distinctions in the governance structure of these entities. In an LLC, members hold voting rights and can elect people to serve on the board. Members of an LLC have ultimate control over the decision-making process and have a say in how much income or loss is distributed among them. Nonprofits are run mostly by boards and may include volunteers with legal responsibility, who manage budgets and make financial decisions. Board members typically do not take a salary or any other form of compensation for their services.
Another difference between LLCs and nonprofit organizations is the way they handle income. With LLCs, some members may receive a greater share of profits than others based on their voting power. With nonprofits, any money coming into the organization must be distributed in a manner that serves the public good as dictated by state law or relevant federal regulations. Additionally, nonprofit revenue comes almost exclusively from donations and fundraising activities whereas an LLC’s profit could come from fund management fees or other sources of revenue.
The distinction between LLCs and nonprofits also lies in how the entities are managed. In an LLC, members have voting rights and can appoint leaders to steer the company. Nonprofits typically do not utilize a voting system and instead are run by boards of volunteers or staff who hold legal responsibility. The board is responsible for managing budgets, funds, and making decisions concerning financial matters as well as general operations. While voluntarily serving on an LLC’s governing body may be rewarded with some type of compensation (discretionary bonus, salary), those who serve on a nonprofit’s board typically do not receive payment for their services due to restrictions placed on the organization from federal law or the state in which it is incorporated. Any profits that arise through donor contributions or fundraising activities must be used for supporting programs and initiatives rather than for financial gain of individuals or organizations associated with the entity.