Nonprofit vs. LLC: Which One is Right For You?

Making the right decision when selecting an entity structure for your organization is critical to long-term success. This blog post will explore two of the most popular entities—LLCs and nonprofits, the pros and cons of each, and some prompting questions to guide you in your decision-making process. 

LLC vs. Nonprofit at a Glance 

Starting an organization is exciting but requires a thorough understanding of the critical differences between each entity. It’s important to note that LLCs and nonprofits operate under different legal and tax rules, each with advantages and disadvantages. 

LLCs are typically created to generate profits, while nonprofits are established to serve a specific public mission, such as charitable, educational, or religious purposes. In terms of teams, LLCs have owners known as members who share in profits and losses, while a board of directors governs nonprofits. Regarding taxes, LLCs are subject to paying income taxes but may be eligible for certain deductions and credits, while nonprofits are typically exempt from federal taxes on income generated from their mission-related activities.

Members of an LLC have limited liability, which means they are not personally responsible for the company’s debts or liabilities. On the other hand, nonprofit board members can be personally liable if the organization cannot pay its debts. Regarding fundraising, nonprofits rely on donations and grants to support their operations, and LLCs are allowed to raise capital through investments and loans. Lastly, if an LLC ceases operations, its remaining assets (if any) are distributed among its members. However, if a nonprofit dissolves, its assets must be distributed to another tax-exempt organization or the federal, state, or local government for public use.

What to Ask When Deciding Between an LLC or a Nonprofit

When determining whether you should start an LLC or a nonprofit, answer the following questions to guide you:

1. What is the primary purpose of your organization?

2. Do you plan to earn a profit or generate revenue?

3. Are you looking for personal liability protection for yourself and other members?

4. Do you want to have the ability to raise capital through the sale of ownership interests? 

5. Are you looking for tax-exempt status?

6. Is your organization mission-driven or focused on providing goods or services to generate income?

7. Do you want to make an impact on a particular cause or community?

8. Do you plan to distribute any surplus income to owners or shareholders?

9. Do you need to have a flexible management structure?

10. Would you like to limit the number of members or stakeholders in the organization?

Benefits of Starting an LLC

LLCs are a popular choice among entrepreneurs and for good reason. They provide personal liability protection, simplify taxation requirements, and offer a range of unique benefits such as flexibility in administration, continuity despite changes in ownership or membership roles, and access to specific grants or funding opportunities. LLCs also have the flexibility to file as either a partnership or corporation for tax purposes and can raise capital by selling ownership interests. Additionally, LLCs have a flexible management structure and can be managed by members or hired managers.

Disadvantages of Starting an LLC

Establishing and maintaining an LLC can be more complex and costly than other business structures. LLCs also have a limited lifespan, which requires regular renewal. LLCs may also require high formation and ongoing compliance costs, self-employment taxes, and some restrictions on the number of members allowed. 

Benefits of Organizing as a Nonprofit 

One of the most significant advantages of starting a nonprofit is the potential to impact your community positively. Many people are driven and inspired by working in service of others – so leading a nonprofit can be incredibly fulfilling.

There are financial benefits associated with starting a nonprofit as well. Nonprofits often have access to grants and other funding that aren't available to for-profit entities. Donations and grants may be tax deductible depending on your tax-exempt status. Some nonprofits may even qualify for discounted rates on services such as web hosting and accounting software. 

Since nonprofits generally don't pay corporate taxes, profits are usually reinvested towards the mission instead of being returned to shareholders or owners, as is the case in for-profit businesses. 

Disadvantages of Organizing as a Nonprofit 

Starting any business venture requires a lot of dedication and hard work, especially for nonprofits. Since most organizations rely heavily on donations from individuals and corporations, there's no guarantee of where or when funding will be received. This creates a lot of uncertainty when managing cash flow within nonprofits. Even with the right resources, managing programs and projects usually requires additional fundraising efforts, which can be time-consuming and tedious. 

Since volunteers or part-time employees make up the staff, burnout in nonprofits is common – especially with stretched-thin nonprofit teams. Lastly, creating meaningful partnerships is a long-term process that can take time – but is incredibly rewarding. If you're motivated to make a real impact in your community and are in it for the long haul, forming a nonprofit may be the perfect way to reach your goals.