Limited Liability Company (LLC) vs. Nonprofit

Both offer personal coverage of liability, which secures your personal property overhead of business-related liabilities or litigation. They however vary in essence in purpose, taxation, management and sharing of profits. These differences are the keys to having the right venture choice.

What Is an LLC?

One of the most famous business structures among startups and small businesses is a Limited Liability Company (LLC). It provides a mixture of individuality liability and flexibility in taxes. In LLC, the company is distinctly separate to its owners (known as members) and so up to the time the business gets into a law suit or an obligation, the personal property of the owners such as homes and savings are usually not in danger.

LLCs are also referred to as pass-through with regard to taxes. This implies that the LLC is not subject to income tax. Rather the profits and losses are passed through to the members who include them on the personal tax returns. The structure makes taxation simple and in most cases the total tax liability of the small business owners is low.

LLCs are very lenient when it comes to being administered. Formal requirements are low and the members are free to run the company directly or or hire managers to run day to day activities. The flexibility of LLCs is applicable to a vast number of businesses.

What Is a Nonprofit?

Nonprofit organizations are established with the aim of serving the people or in pursuit of a certain charitable cause. Examples of typical nonprofitable goals are educational programs, scientific research, religious or cultural programs, social services, animal protection, and amateur sports development. In comparison with LLCs, the main objective of a nonprofit is not to make profits to its owners, but the service to the common good.

Nonprofits are usually organized as corporations, but in others, it can be structured as a trust, or association. In order to receive the federal tax-exempt status as defined by the IRS regulations, the eligible nonprofits are required to seek 501(c)(3) status, which acknowledges the organization as a tax-exempt organization because of the charitable purpose.

Important LLCs and Nonprofits differences

The LLLC and nonprofits are different in various important ways, such as the purpose, the form of ownership, the manner of distributing profits and taxes.

Purpose

LLCs are aimed at making profits to the members. The business should offer goods or services which will bring revenue and the profits are shared among the owners as per their agreements.

In comparison, nonprofits are structured to serve the society or a charity. Any extra revenues should be invested in the mission of the organization, and it cannot be given to the founders and members besides reasonable wages.

Ownership and Management

LLCs may also be operated by the members or by assigned managers. Member-managed LLCs are typically used with small businesses in which all owners are more actively engaged whereas the manager-managed LLCs can provide passive members with an opportunity to be less interested in the day-to-day activities of the business.

The management of LLC is formalised in an operating agreement, which stipulates the percentage ownership, distribution of profits, voting rights, member duties, selling/transfering of interest procedures and dispute solving methods. A detailed operating agreement is strongly advised even though not all the states may make it mandatory.

A board of directors is required by law in the work of nonprofits that serve to control the running of the organization and put it within the context of its mission. Founders can be management and hold no title to the management of the nonprofit in the conventional sense; it is thought that the beneficiary of the work of the organization is the public.

Profit Distribution

LLCs are flexible in allocation of profits. Profits are usually shared based on ownership interests of members, the operating agreement may define any system that the members may agree with.

However, nonprofits are strictly forbidden to make any profits offered to owners. The founder or staff salaries should be fair and any excess money should be invested in the charitable goals or given out to the causes associated with the organization.

Taxation

The LLCs are flexible in terms of taxation. Single-member LLCs are defaulted to be taxed like sole proprietorships whereas multi-member LLCs are taxed like partnerships. Its two forms are both pass-through taxed, which means that the profits and losses are taxed on individual member tax returns, and the members are also taxed on self-employment income.

LLCs can even choose to be taxed as a C-Corporation or S-Corporation. The C-Corp taxation tax applies corporate tax rate (21) on the profits but the distributions are taxed at the individual level again, leading to taxation twice. With S-Corp taxation, members are not subject to the self-employment taxes, as they can receive a salary and draw other profits in form of distributions. Nevertheless, this comes at the cost of further bookkeeping and payroll management and, hence, the benefits of good finances should be more than these costs.

Nonprofits typically pay no taxes, so long as they are sanctioned by the IRS under 501(c)(3) status. This will waive federal taxation of income of the organization, but may necessitate further application of state-level tax exemptions. Gifts to nonprofits are frequently tax-deductible, and so it encourages the population to make a contribution.

Can an LLC Be a Nonprofit?

Interestingly enough, an LLC may also be a nonprofit, but this is very unusual and there are serious demands. In order to obtain federal tax-exempt status, a nonprofit LLC should:

• Keep its mission to charitable work that is acknowledged by the IRS
• Make sure that all its assets are committed to its charitable mission
• Add a dissolution provision that will state that in case of the dissolution of LLC, assets will be donated to charity
• Lead operations as per the mentioned charitable cause

Nonprofit LLCs are forced to be taxed as corporations by the IRS even when they are approved. The state level may also limit or establish the operation of the nonprofit LLCs. An LLC is not eligible to file its application as IRS Form 1023-EZ but as IRS Form 1023, which is the streamlined form of the application.

Conclusion

Your mission and objectives will determine to a large extent the choice of LLC or nonprofit.

An LLC is the best choice when your main goal is to make profit and you have control over the business and still have flexibility in management and taxation.

The best option is a nonprofit, in case the focus of your mission is based on the common good, and tax exemption is applicable, and all excess funds are reinvested into your charitable work.

Some entrepreneurs can also enjoy the flexibility of LLC and nonprofit status, but this will need thorough planning, compliance with IRS regulations, and compliance by states. Knowing the distinctions between these structures will make sure you make informed choices and your assets are safe, you are not breaking any law and maximizing your business or charitable cause.