This post contains affiliate links, and we will be compensated if you buy after clicking on our links.
Read our review guidelines.
Navigating the decisions between a nonprofit and an LLC requires an exploration of key business concepts.
Business structures can be complicated, so you’re not alone in any difficulties you’ve faced while trying to understand LLCs and nonprofits.
This article will address the major points of difference between nonprofits and LLCs so that you’re able to make an informed decision
We will define nonprofit and LLC, investigate the types of nonprofits available, the benefits and drawbacks of both structures and provide insights into how to make your choice.
Also, be sure to consult the FAQ at the end of this article if you have additional questions.
- A Limited Liability Company (LLC) is a business structure that offers its owners asset protection, pass-through taxation, and managerial flexibility.
- A Nonprofit Organization (NPO) is a business structure that prioritizes uplifting a political, social, scientific, or other cause over making a profit.
- There are many types of nonprofit organizations, which are typically reflective of the cause that the NPO supports.
- Overall, nonprofits are designed specifically for charitable purposes, while LLCs are structured like a typical business which prioritizes profits.
- Remember: choose the nonprofit structure if your reason for opening your business is charitable. Otherwise, an LLC may be the most suitable choice for you.
Nonprofit Organization (NPO)
A nonprofit organization (NPO) is a business structure that prioritizes uplifting a political, social, scientific, or other cause over making a profit.
NPOs are usually affiliated with universities, religious institutions, and other organizations with non-monetary goals, such as education or activism.
NPOs pay substantially less money in taxes, which overcomes the emphasis on the cause of the business and not profits.
Also, NPOs usually require volunteer or unpaid work, as most of their money has to go toward their chief cause.
In addition to needing cheaper or free labor, NPOs rely on significant donations to remain operational.
Types of Nonprofits
There are many types of nonprofit organizations, which are typically reflective of the cause that the NPO supports.
Take a look:
- 501c(3) – This NPO type covers a wide variety of charitable causes and is the most popular type of nonprofit. If you choose this nonprofit type, you may benefit from general nonprofit tax deductions, but your organization won’t have specialized considerations for its type, as with other NPOs.
- 501c(4) – This NPO type is tailored to organizations that support social causes, such as with advocacy, but they are not strictly charitable. Thus, the donations are not always tax deductible.
- 501c(5) – The 501c(5) NPO type is focused on agricultural and labor activities, in order to promote the interests of working people in these areas. Labor unions are usually included in this NPO type.
- 501c(7) – The 501c(7) nonprofit is for the betterment of society. Social and recreational clubs are covered under this NPO, such as the Young Men’s Christian Association (YMCA).
- 501c(9) – Voluntary employee beneficiary associations (VEBAs) are part of the 501c(9) nonprofit type. These organizations provide life, accident, sickness, or other benefits to employees who have needs that aren’t covered by their employers or other sources.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure that offers its owners asset protection, pass-through taxation, and managerial flexibility.
The limited liability aspect of an LLC relates to the legal protections the members of the business are afforded.
In terms of taxation, all taxes are passed through the personal income tax of each member.
Lastly, LLCs don’t have as many rules as other structures, such as corporations.
So, any responsibility within an LLC can be given to anyone, no matter the role in the company.
What’s the difference between a nonprofit and LLC?
There are a few differences between a nonprofit and an LLC, as seen in the chart below.
Overall, nonprofits are designed specifically for charitable purposes, while LLCs are structured like a typical business which prioritizes profits.
|Focuses on a mission to benefit the public
|Focuses on profits
|Donations are tax-deductible
|Flexible hierarchy and limited liability
Benefits & Drawbacks
Let’s dive into the benefits and drawbacks of both business structures, which can be examined to make your structural decisions easier.
Goals are charitable
Funding and grants are easy to obtain
Relies on big donations
Labor is hard to find
Profits can be kept
No tax-exempt status
Fundraising is challenging
How to choose between a nonprofit and an LLC
The most important question to ask yourself when choosing between a nonprofit and an LLC is, “What is the overall goal of my business efforts, financial or other?”
If you are operating your business to champion a just cause, you may benefit from opening a nonprofit.
Also, if you believe that you can obtain donations easily, the nonprofit organization structure can be a boon.
Otherwise, an LLC structure is perfect for small businesses that are looking to make a profit while following simple rules.
Nonprofit vs. LLC: Which option is best for you?
Now that you’ve reached the end of this article, you are ready to embark on your LLC or nonprofit journey.
Remember, choose the nonprofit structure if your reason for opening your business is charitable.
Otherwise, an LLC may be the most suitable choice for you.
Can an LLC be a nonprofit?
No, an LLC cannot be a nonprofit. Nonprofits have specific requirements that are focused on causes of a charitable, social, or educational nature.
Can you incorporate a nonprofit?
No, you cannot incorporate a nonprofit. However, nonprofits organize themselves and draft articles of incorporation.
Can a nonprofit or LLC help minimize estate taxes?
Yes, both of these business structures can minimize estate taxes.
Nonprofits, especially 501c(3) status, can minimize taxes through charitable deductions. LLCs can provide benefits through the tax structure as well.