Difference Between an LLC & a Non-Profit

By Larissa Bodniowycz, J.D.

Difference Between an LLC & a Non-Profit

By Larissa Bodniowycz, J.D.

Both limited liability companies (LLCs) and nonprofit organizations offer limited liability protection to those involved in running them. They are otherwise very different. As two different types of legal entities, they have different purposes, tax obligations, structures, and requirements.

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Purpose of an LLC and a Nonprofit

The key difference between LLCs and nonprofit organizations are that they have very different purposes. The purpose of a limited liability company is to operate a business with the goal of making a profit, while also providing protection for personal assets.

Under the Internal Revenue Service rules that govern nonprofits, the purpose of a nonprofit organization must exclusively be 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 and Nonprofits Are Taxed

LLCs, like any other business venture, owe state and federal taxes on their income. As a way of encouraging the formation of nonprofits, the government grants state and federal tax exemption to properly formed and operated nonprofits. To obtain tax exempt status with the IRS, an organization usually must form as a corporation. In most cases, LLCs do not qualify for tax exempt status with the IRS.

Even for properly structured nonprofit organizations, tax exempt status is not automatic. A nonprofit must apply with the IRS and its state for tax exempt status. These authorities review the application to ensure that the nonprofit meets all of the requirements for tax exemption.

Distribution of Profits

Despite its name, a nonprofit organization can earn a profit—just like an LLC. The difference between the two entities is how they use profits.

An LLC can choose to reinvest its profits into the business or to distribute some or all of its profits to the owners. This is one of the advantages of LLC ownership: when the LLC does well, you stand to profit. In contrast, nonprofit organizations cannot distribute profits to persons who operate the nonprofit. Employees of a nonprofit earn reasonable salaries that do not increase with the success of the organization. Nonprofits instead must use their profits to operate the nonprofit or donate the profits to another eligible charitable organization.

LLC and Nonprofit Ownership

LLCs call their owners, who might be individuals or other companies, "members." LLC members typically make financial contributions to the LLC and participate in making important decisions about the management of the LLC and sometimes manage the day-to-day operations of the business.

Nonprofits do not have owners. They "belong" to the public. In the nonprofit context, different people take on the roles held by members of LLCs. Donors provide the financial contributions required to start and operate nonprofits, board members make high-level decisions, and officers manage day-to-day operations.

Terminate an LLC and a Nonprofit

For different reasons, LLCs and nonprofits may decide they no longer want to operate. Both can choose to shut down, but their options differ. New owners (either individuals or other businesses) can buy an LLC, or the original owners can wind up its affairs and distribute any remaining funds among themselves. Nonprofits, in contrast, are not available for sale, and they must distribute all their remaining assets, including funds, to another qualified nonprofit organization. That is their only option.

While an LLC and a nonprofit organization may initially look similar because they both offer limited liability protection, they are very different. An LLC is a for-profit business venture, and a nonprofit is an organization created for a charitable cause. When deciding what kind of business or organization you'd like to run, it's important to consider what the goals of your company are and how best you could accomplish them by running either an LLC or a nonprofit.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.