Nonprofit vs LLC: Which Should You Form for Your Cause?

You have a cause you care about, and you want to build something around it. One of the first questions you'll face is how to set it up: as a nonprofit or as an LLC.

A nonprofit corporation and an LLC both create a legal business that's separate from you, which can help protect your personal assets from business debts. But they differ in who controls the organization, how its money is used, how it's taxed, and where its funding comes from.

This guide compares the two side by side so you can decide which one fits your goals.

Nonprofit vs. LLC Quick Comparison

The table below sets the two options side by side. The sections that follow explain each difference in more detail.

What is a Nonprofit Corporation?

A nonprofit corporation is formed under state law to serve a public or community purpose rather than to earn profits for owners. It can bring in more money than it spends, but that extra money has to support its mission.

Forming a nonprofit with your state and getting tax-exempt status from the IRS are two separate steps. Our help article on what a nonprofit corporation is covers the basics.

What is an LLC?

A limited liability company (LLC) is a business owned by one or more members. It can help protect your personal assets from the business's debts.

An LLC can run a regular business while also supporting a social cause. A coffee shop that donates part of its profits, or a company that hires people facing barriers to work, can both be LLCs. You can read more in our guide to what a limited liability company is.

Key Differences Between a Nonprofit and an LLC

The main differences come down to control, pay, taxes, funding, and ongoing requirements.

Ownership and Control

Who owns a nonprofit? No one.

Unlike an LLC, a nonprofit has no owners. A board of directors oversees it and is responsible for keeping its work focused on the mission. As a founder, you can sit on the board and often serve as the executive director, but you don't own the organization and can't sell it.

Most states require a minimum number of directors, which you can check in our help article on how many directors a nonprofit needs.

An LLC belongs to its members, who make decisions under the operating agreement. Depending on that agreement, members can usually sell their share or pass it on to someone else.

Profits and Paying Yourself

You can be paid for your work with either structure, but the rules are different.

• Nonprofit: If you work for the nonprofit, you can earn a reasonable salary. That means pay in line with what similar organizations pay for similar work. You can't share in the profits, and the nonprofit's earnings can't be used to benefit insiders.
• LLC: Members can take out the profits the business earns, following the rules in their operating agreement.

Our help article on whether a nonprofit founder can receive compensation goes into more detail.

Taxes

A nonprofit with 501(c)(3) status generally doesn't pay federal income tax on money from its mission work. However, income from a business activity that isn't related to the mission may be taxed.

For example, a literacy charity that runs a parking lot as a side business may owe tax on that income. If a nonprofit has $1,000 or more in gross income from that kind of activity in a year, it generally must file Form 990-T to report it. Many nonprofits can also apply for state tax exemptions.

By default, an LLC's profits pass through to its owners for federal income tax. A single-member LLC is generally taxed like a sole proprietorship, while a multi-member LLC is generally taxed like a partnership. Either way, owners report their share of the profits on their personal returns, and self-employment tax usually applies too. An LLC can also choose to be taxed as a corporation, as our guide to LLC tax benefits explains.

Funding: Donations, Grants and Investors

For many people starting a mission-based organization, funding is the deciding factor.

A 501(c)(3) nonprofit can accept donations that donors can deduct on their taxes. Many foundations and government programs only give grants to 501(c)(3) organizations. If you plan to rely on donations and grants, a nonprofit is usually the better fit.

Can an LLC accept donations? It can, but donors generally can't deduct those gifts, because the IRS only allows charitable deductions for gifts to qualified organizations. That can make it harder to raise money from people who want a tax benefit for giving.

On the other hand, an LLC can take on investors, sell ownership shares, and borrow against its future profits, which a nonprofit can't do in the same way.

Paperwork and Ongoing Requirements

A nonprofit has more rules to follow. You'll usually need bylaws, a board that meets regularly, records of its decisions, and a dissolution clause stating that the nonprofit's assets will go to another charity if it closes.

Most 501(c)(3) organizations file a version of Form 990 with the IRS every year, and a nonprofit that doesn't file for three years in a row automatically loses its tax-exempt status. Many states also require charities to register before asking the public for donations. For the full list, see what reports a nonprofit needs to file.

An LLC has fewer formal requirements. Most states ask for an annual or biennial report, and you'll file tax returns. An LLC operating agreement sets out how the business is managed and how members make decisions, but there's no board to run, and no yearly IRS information return like Form 990.

Cost to Start a Nonprofit vs an LLC

Both structures require a state filing fee, and a nonprofit seeking 501(c)(3) status also pays an IRS application fee.

Here's how the costs compare in California, Texas, and New York.

Smaller nonprofits may qualify for the shorter Form 1023-EZ. To use it, your yearly gross receipts must be $50,000 or less and your total assets $250,000 or less. Our guide to Form 1023 vs. 1023-EZ explains which one to file. State fees change from time to time, so check your state's current fee before you file. If money is tight, these tips for starting a nonprofit on a small budget can help.

How LLCs and Nonprofits Can Be Connected

An LLC and a nonprofit are separate legal structures, but they can be connected in a few ways. An LLC may qualify for 501(c)(3) status in limited circumstances, a nonprofit may own an LLC, and an existing organization may explore changing its structure. Here's what each arrangement involves.

Can an LLC Be a Nonprofit?

The IRS allows some LLCs to qualify for 501(c)(3) status, but the rules are narrow.

It has generally recognized LLCs as 501(c)(3) organizations only when their members are themselves tax-exempt organizations or government agencies. An LLC owned by individuals usually won't qualify, and LLCs can't use the shorter Form 1023-EZ. That's why most people who want to run a charity form a nonprofit corporation instead.

Some states allow an LLC to convert directly, but the usual path is to form a new nonprofit corporation and transfer the activities or assets you want it to have. If you already have an LLC, our page on how to convert an LLC to a nonprofit walks through the steps.

Can a Nonprofit Become an LLC?

Not directly. A 501(c)(3) nonprofit's assets are dedicated to its mission, so they can't be handed over to private owners. Changing course usually means closing the nonprofit, giving its remaining assets to another tax-exempt organization, and then forming a new LLC. Our page on converting a nonprofit to an LLC explains the process.

Can a Nonprofit Own an LLC?

Yes. A nonprofit can form an LLC and own it. Some nonprofits do this to run a separate activity, hold property, or keep a riskier program apart from the main organization. If the nonprofit is the only member, the IRS generally treats the LLC as part of the nonprofit for federal tax purposes. Under state law, the LLC is still a separate legal entity.

Which Should You Form for Your Cause?

Your funding plans, how much control you want, and your long-term goals can point you to the right choice.

A nonprofit may fit better if:

• Your main goal is to serve the public or a community, not to earn a profit.
• You plan to fund your work mostly with donations and grants.
• You're comfortable sharing control with a board.
• You're comfortable working for the organization without owning it or sharing in its profits.

An LLC may fit better if:

• You want to own the business and keep its profits.
• You'll earn most of your money by selling products or services.
• You may want to bring in investors or sell the business someday.
• You want fewer formal requirements and more control over decisions.

If neither option seems like a clear fit, you can compare business types and explore other structures with our comparison tool.

Options in Between: L3Cs, Benefit Corporations and Running Both

If you want to earn money and do good at the same time, you're not limited to these two choices.

L3C (Low-Profit Limited Liability Company)

An L3C is a type of LLC that puts a charitable or educational purpose ahead of profit. It's designed to attract program-related investments from private foundations. Only a handful of states offer L3Cs, and an L3C is still taxed like a regular LLC, so donations to it aren't tax-deductible. Check your state's laws to see whether it's an option.

Benefit Corporations and Benefit LLCs

A benefit corporation is a for-profit corporation that commits to a public benefit alongside making money. It can pay its owners, but it has to consider its impact on society and, in most states, report on it. A few states also allow benefit LLCs. Unlike a 501(c)(3) nonprofit, a benefit corporation is a for-profit business, so gifts to it aren't tax-deductible. Learn more about what a benefit corporation is, or read about the pros and cons of starting a social enterprise.

Running an LLC and a Nonprofit Side by Side

Can you have an LLC and a nonprofit? Yes. An LLC can't own a nonprofit, since no one owns a nonprofit, but the same founders can start both. Some founders run an LLC for their paid work and a separate nonprofit for their charitable programs.

For example, a fitness coach might run a training business as an LLC and a youth sports nonprofit on the side. The LLC and the nonprofit should keep separate bank accounts and records, and each should follow its own rules for making decisions. Any deals between them, like renting space, should be at fair market prices.

How to Get Started

After you choose a structure, you'll file your formation paperwork with your state and, for a nonprofit, decide whether to apply for tax-exempt status.

• Forming a nonprofit: File articles of incorporation, adopt bylaws, get an EIN, and then apply for 501(c)(3) status. Swyft Filings can help you form a nonprofit corporation for $0 + state fees and prepare your 501(c)(3) application.
• Forming an LLC: File articles of organization, create an operating agreement, and get an EIN. You can form an LLC online for $0 + state fees with Swyft Filings.

Swyft Filings has helped 600,000+ businesses with formation and ongoing filings, and we can help you get started with either structure.

Conclusion

The right structure depends on how you plan to fund your work, who should control it, and whether you want to earn profits as an owner. Weigh those priorities first, then choose the nonprofit, LLC, or in-between option that fits your plans.