Non-Profit vs LLC: The Ultimate Guide

Non-Profit vs LLC: The Similarities

Both LLCs and Nonprofits are Legal Business Entities

Both LLCs and nonprofits are business entities. The law recognizes both of these business entities as entities separate from their owners.

The moment you file the necessary paperwork with your state and the federal authorities, your LLC or nonprofit will be recognized as a separate business entity, from a legal perspective.

Both LLCs and Nonprofits Provide Liability Protection

Due to the fact that both LLCs and nonprofits are considered separate legal entities from you, the owner, they both provide liability protection for your personal assets. Meaning, if someone would attempt to take legal action against your LLC or nonprofit, then your personal assets would not be at risk.

In general, a business entity that is separated from your personal entity, will provide liability protection for your personal assets.

Both LLCs and Nonprofits Need To Comply With State and Federal Laws

Whether your business entity is an LLC or a nonprofit, your business entity must comply with your state and federal rules. This means you must have all licenses and permits in place. If you fail to comply with the rules and regulations, you may cause your business entity to not be recognized as a separate entity from yourself. This may jeopardize your personal assets. A nonprofit’s regulations are more strict, due to the tax-exempt status that it has.

Both LLCs and Nonprofits Can Generate Revenue

Whether your business entity is an LLC or a nonprofit, your business entity can sell both services and products. As a result of these sales, your business entity will generate revenue.

The revenue your LLC or nonprofit generates is legal. For an LLC, the revenue will be generated as a result of what the business is offering, whether it is products or services. If a nonprofit chooses to pursue generating revenue, then the revenue will be generated in addition to various other donations, gifts, and grants.

For example, American Cancer Society, a registered nonprofit, generates revenue aside from their donations, gifts, and grants.

Check it out.

Both LLCs and Nonprofits Can Pay Salaries

Both LLCs and nonprofits are required to pay their employees. For nonprofits, this includes all members on your staff.

Similarly, for LLCs, this includes all your staff members (usually aside from your “LLC owners / members”). All employees of your LLC or nonprofit will pay taxes on their salaries.

When it comes to paying salaries to your nonprofit-employees, the only condition you must follow is that the salary must be a reasonable salary and it cannot increase with the success of your nonprofit organization.

Non-Profit vs LLC: Differences Between LLCs And Non-Profits

Purpose of LLC vs. Nonprofit

LLCs and non profits are fundamentally different, they have very different purposes. Your goal of an LLC owner is to generate profit, to make yourself wealthier.

Under the IRS rules, who governs nonprofits you do not create a nonprofit for selfish purposes or to make yourself wealthier. That is not the purpose of a nonprofit.

Instead, your goal and your purpose is to exclusively do one of the following: “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition … or the prevention of cruelty to children or animals.”

How LLCs vs. Nonprofits Generate Revenue?

Both LLCs and nonprofits can charge for products and services. For LLCs, this is generally how they generate revenue and profits, from within their business entity.

In contrast, for nonprofits, although they do indeed sell products and services from within their business, this is not their primary strategy for generating revenue. Instead, nonprofits utilize external strategies to bring in revenue.

For example, it is standard practice for nonprofits to accept donations, gifts, and grants. Generally, external options serve as their primary source for revenue.

How LLCs vs. Nonprofits Distribute Profits?

Unlike a nonprofit, you can indeed personally profit from your LLC. You probably know by now that nonprofits are allowed to make profits, just like an LLC. The difference is what they do with their profits.

Your LLC can choose to either distribute some or all of your profits to your members or you can reinvest your LLC’s profits back into your business. By your nonprofit, however, you do not have the option to distribute any of your profits to any of your “nonprofit operators” (to any persons who operate your nonprofit organization). Instead, you must use your profits to operate your nonprofit.

The only other option you have with your profits is that you can donate the profits to a different charitable organization. You, not distributing nonprofit-profits to your “nonprofit operators” is only applicable to profits. However, you do indeed have the option to pay salaries to your nonprofit-employees.

When it comes to paying salaries to your nonprofit-employees, the only condition you must follow is that the salary must be a reasonable salary and it cannot increase with the success of your nonprofit organization.

How LLCs vs. Nonprofits Pay Taxes?

LLCs like most other business entities, pay both state and federal taxes. Nonprofits, however, do not always pay taxes. In order to incentivize people to start nonprofits, the governments on both the state and federal levels exempted nonprofits from paying taxes.

To obtain such a tax-exempt status, you need to follow the necessary paperwork with both your state and the IRS. In almost all cases, LLCs will not qualify for tax-exempt status, even if they perform charitable activities. For this reason, the nonprofit organization should be formed as a corporation.

Now, you must understand the following:

Even if you properly form a nonprofit corporation (on a state level), you will not automatically obtain tax-exempt status (on a federal level). You must apply with the IRS to obtain the 501(c)(3) tax status. There are requirements that you will need to meet in order to obtain the 501(c)(3) tax status.

How LLCs vs. Nonprofits are Owned?

By your LLC, your owners may be comprised of other entities or other individuals. Your LLC owners are called “members”. LLC members are usually the ones who make financial investments in your LLC.

In addition, they also make important decisions regarding the day-to-day operations of you LLC. Nonprofits, however, do not have specific owners or members. Instead, it is the public who own nonprofits. In terms of the roles that members play in LLCs, nonprofits have their own substitutes who take care of them.

For financial investments, nonprofits have donors who contribute finances to start and operate the nonprofit. In terms of the decisions regarding the day-to-day operations, nonprofits have board members who supervise and make all the high-level decisions for the nonprofit.

How LLCs vs. Nonprofits Get Terminated?

There are a plethora of reasons why you would choose to terminate your LLC or nonprofit.

For LLCs, besides the option of distributing any remaining assets and profits amongst you LLC members, you have the option to sell your LLC to another business entity or individual.

In contrast, nonprofits do not have the option to sell themselves to another business entity or individual.

Instead, a nonprofit must take all of its assets and profits and distribute it to another charitable organization.

That is the only option.

LLC or Non-Profit: Which Is For You?

When is an LLC for you?

• You want to make profits
• You are ready to pay taxes.
• Want a business structure run by members / people who’ve invested in the company.
• You’re not ready for such strict compliance and regulation requirements.
• You’re not ready for revenue to be primarily based on donations, gifts and grants.

When is a Nonprofit for you?

• You want to limit how much money each person can take.
• You want the money generated by your business structure to go to charitable initiatives.
• Want to get a special tax exempt status.
• You want directors to run your company, instead of private owners.
• You want to raise capital through donations, gifts, and grants.
• If you are ready to follow strict compliance and regulation requirements.

Nonprofit vs. LLC: Frequently Asked Questions

Can You Start A Nonprofit Under An LLC?

Nonprofit organizations are typically incorporated.

However, can a nonprofit be an LLC?

The answer is: yes! But only If your LLC fits into a very specific category.

Your LLC has to be:

• Owned by a non profit organization.
• In a state where a “nonprofit LLC” is recognized.
• It meets the 12 requirements set forth by the IRS mandate called: “Limited Liability Companies as Exempt Organization Update”.

In a scenario where you meet these 3 conditions, then you can be both an LLC and a nonprofit aka a “nonprofit LLC”.

Due to the high difficulty of having your LLC meet these requirements, most people don’t make their LLCs into nonprofits. Just think about it. You, as the owner of the LLC nonprofit, would have to form yourself as a tax-exempt nonprofit organization. Only then, would you be able to make your LLC into a nonprofit.

To make this already crazy situation worse, if your LLC nonprofit would be owned by more than one member, each of the members would have to form themselves as a tax-exempt nonprofit organization.

The reason why you, as the owner of the LLC, would have to incorporate yourself as a tax-exempt nonprofit organization is because nonprofits cannot be owned by any specific individuals unless it is a nonprofit.

Only if the owner is another nonprofit entity, can the nonprofit be owned. For this reason, in order to make a “nonprofit LLC”, you need to make sure that the members (of the LLC) are already tax-exempt nonprofit organizations.

To summarize: the concept of “nonprofit LLC” does indeed exist. However, due to its extreme difficulty to form, most people choose the simple option, a nonprofit corporation.

Why Would A Nonprofit Be An LLC?

You may want you nonprofit to adopt LLC status because:

• When your assets (real estate properties) and/or activities (bungee jumping) include greater risks, LLC status may be appropriate for your nonprofit organization.
• When your business goals are not solely charitable, then LLC status for your nonprofit organization may be beneficial. In such an event your business entity will not qualify for 501(c)(3) tax status. Meaning you will be obligated to pay federal taxes.
• You may want to adopt LLC status for your nonprofit organization if you want your business entity to joint venture with one or more entities. The LLC hosting the joint venture may be tax-exempt if all the members are tax-exempt entities. If, however, not all members are tax-exempt entities, then the LLC housing the joint venture will be taxed.  

Should My Nonprofit Be An LLC?

Making your nonprofit into an LLC will probably waste a lot of your time. It is definitely more complicated for nonprofits to adopt LLC statuses. For this reason, most people do not adopt LLC status for their nonprofits. Instead, adopting corporation status is the more popular choice for nonprofits.

Can A Nonprofit Make Money?

Yes! Nonprofits are allowed to generate revenue.

When a nonprofit chooses to pursue generating revenue (by selling products or services), then the revenue generated will be in addition to various other donations, gifts, and grants. In terms of the profits, however, you do not have the option to distribute any of your profits to any of your “nonprofit operators” (to any persons who operate your nonprofit organization).

Instead, you must use your profits to operate your nonprofit. The only other option you have with your profits is that you can donate the profits to a different charitable organization. You, not distributing nonprofit-profits to your “nonprofit operators” is only applicable to profits.

However, you do indeed have the option to pay salaries to your nonprofit-employees. When it comes to paying salaries to your nonprofit-employees, the only condition you must follow is that the salary must be a reasonable salary and it cannot increase with the success of your nonprofit organization.

What Are The 3 Types of Nonprofits?

Most nonprofits are able to become one of 3 types of nonprofits.

The options include:

1. Public charities
2. Private foundations
3. Private operating foundations