Nonprofit vs LLC – What’s the Difference?

If you have an idea for an organization, one of the first things you need to figure out is what type of organization will best suit your needs. Two of the most common types of organizations are LLCs and nonprofits—but how can you know which one to choose?

In this article, we will explain all you need to know about nonprofits vs. LLCs. We will explain what they are, their key differences, and how they are structured.

By the end, you should have a good idea of whether a nonprofit or LLC fits your specific needs.

Let’s dive in.

To begin, let’s start by defining both nonprofit organizations and LLCs.

What Is a Nonprofit Organization?

A nonprofit organization is an organization that is created to serve the public good in some way.

Nonprofits are unique in that they have specific missions, and their goal is to fulfill those missions rather than to earn a profit. Whatever profits the organization earns are reinvested back into the nonprofit to further its great work.

There are a wide range of different missions a nonprofit could have. Examples include preventing homelessness in a specific community, promoting literacy in school-aged children, or anything in between—just as long as it serves the public good in some way.

Because nonprofits serve the public, they are tax-exempt. This means that they do not have to pay federal, state, or local taxes. To officially qualify for this tax-exempt status, they must meet federal guidelines to become a 501c3 organization including:

• The organization must be established for exempt purposes, including charitable, religious, educational, scientific, literary, public safety, amateur sports, or to prevent cruelty to children or animals. Full details on what qualifies can be found here.
• The organization cannot be organized to benefit the private interests of an individual or private shareholder,
• The organization cannot participate in any political activity, including campaigning or lobbying.

While nonprofits don’t have to pay taxes, 501c3 organizations still need to file tax returns each year to account for how they spend their money. If found in violation, the nonprofit could lose its 501c3 status.

What Is an LLC?

An LLC is a limited liability company that, unlike nonprofits, is established in most cases to make a profit.

LLCs are privately owned by individuals or multiple people. Regardless of how many owners there are, they are each called members. LLCs are often incorporated because they protect the owners with liability protection.

What this means is that the owners of an LLC are not personally responsible for the company’s debts and liabilities as long as they were incurred on behalf of the business. This is one of the biggest reasons why people start LLC organizations.

LLCs also offer flexibility, allowing business owners to try different business and operating models until they find one that works for them, especially when it comes to maximizing profits. All members of the team—even if there is just one—share in the business’s profits and losses, and they can distribute profits as they see fit.

LLCs can be founded for any reason as long as it’s legal, so you don’t have to worry about the business’s intent. You can create an LLC for a wedding planning business, a media company, or any other business idea you might have.

Ultimately, you incorporate as an LLC to protect yourself as an individual, as well as to reap the tax benefits of being a business owner.

Now that you know a little bit more about nonprofits and LLCs, let’s break down some of their key differences.

Tax Status

The biggest difference between a nonprofit vs. an LLC is its tax status.

As mentioned earlier, nonprofits—so long as they have been granted 501c3 status from the IRS—are exempt from paying federal and state income tax. Additionally, all donations made to nonprofits are tax deductible. Nonprofits may not have to pay real estate taxes or sales tax, though you’ll want to look into local regulations to make sure there are no surprises come tax season.

On the other hand, LLCs are subject to all taxes, though the rates will vary.

In most cases, the LLC tax rate will be the same as the individual federal income tax rate. Keep in mind that these rates vary year over year, so it’s important to understand where your business falls to ensure you are properly withholding taxes. If not, you will be subject to fines and owe the state and/or federal government after you file taxes.

Profit

Nonprofits cannot make a profit, whereas making a profit is often the main reason many people start an LLC.

Nonprofit organizations can make money, but they cannot make a profit. Instead, they need to re-invest their revenue back into the organization, which is great because it means that they can do even more good work within their community.

For example, say your nonprofit received more donations or grants than you had expected. You could then use that surplus in your budget to do more good work, furthering the organization’s impact. Perhaps you’re able to serve more meals at a community kitchen or provide even more after-school programs.

On the other hand, an LLC would probably divide any surplus among shareholders as a bonus since they can use their profits as they see fit.

Purpose

One of the biggest differences between nonprofits and LLCs is their purpose or intent behind the organization.

LLCs can be founded for any number of reasons, though typically, the end goal is to make money.

The same cannot be said about nonprofits.

In order to qualify as a nonprofit, you must serve either the public interest or a charitable purpose. Your mission has to be your main purpose, and everything you do should center around fulfilling it.

Governance

Legally, nonprofits are federally required to have a Board of Directors with at least three members that meet at least once a year.

A nonprofit’s board is responsible for overseeing the strategic vision of the organization to ensure that it’s fulfilling its mission effectively and responsibly.

There may be additional state regulations a nonprofit must follow when it comes to its governance structure, so make sure that you are familiar with these to avoid fines or potential loss of status.

LLCs, on the other hand, have more flexibility with their governance. They can have a Board of Directors if they choose, but there doesn’t have to be a set amount of members. They can have as few or as many members as they wish to help steward the company and inform their business decisions—even if it’s just one member.

Ownership

Nonprofits aren’t owned by a single person or entity—even if you founded it. That’s why if the founder is still involved, their title is typically Executive Director vs. owner/operator.

Instead of an owner, nonprofits are managed by their boards, so all governing decisions need to be approved by the board before moving forward.

This is not the case for an LLC. An LLC can be owned by one individual, 10 individuals, corporations, other companies, and in some cases, even a nonprofit organization.

Political Activities

Nonprofit organizations are not allowed to engage in any political activities or lobbying, regardless of the cause. If they do, they could risk losing their 501c3 status.

However, LLCs are allowed to participate in these activities. If they wanted to make a contribution to a political campaign, they could. Additionally, the owner could go to DC and speak at a hearing if they wanted to. There are no restrictions on how they can act or operate as long as it is legal.

At the end of the day, when you’re trying to tell the difference between a nonprofit and an LLC, look at its purpose. If its work helps further the public good, it’s probably a nonprofit. If it’s to generate a profit, it’s probably an LLC or other kind of for-profit entity.

If you think you want to start your own nonprofit organization, check out this helpful guide. Here at Instrumentl, we want to help you maximize your nonprofit’s funding so that you can maximize the impact you’re making in your community!