The United States offers many business structures to meet the varying goals of entrepreneurs and organizations. These different business structures also determine the relevant taxation, ownership, liability, and nature of operations. Broadly speaking, for-profit organizations are focused on making profits, while nonprofits are mostly formed to provide services and public goods.
Even within the nonprofit organization structure, there are two subdivisions: Nonprofit LLC and Nonprofit Corporation.
Read on to explore nonprofit LLC vs. nonprofit corporation. You can also reach out to Manay CPA for specific questions and expert help.
Breaking Down Nonprofit Business Structures
One of the first steps you must take before creating a nonprofit organization is to understand its different structures. Based on this information, you can decide which one best meets your goals.
How Nonprofits are Structured
Nonprofit organizations, as the name suggests, exist to perform a service. Their goal is not to make profits. Many nonprofit organizations exist in the charitable, religious, educational, and social areas today. However, they must also follow the relevant federal, state, and local laws.
Based on the factors below, they can be categorized:
Based on Purpose
The following are the different structures based on the organization’s goals:
- 501(c) – These are the most common types and include many charitable institutions and private foundations
- 527 – Political organizations that can include a party, committee, fund, association, etc.
- 501(d) – Religious associations that serve the communal religious community
- 501(k) – Childcare organizations
- 501(q) – Credit counseling services
- 521(a) – Farmers’ cooperatives
Based on Geography
Depending on the geographical region, a nonprofit organization structure can be divided into a corporation and an LLC:
- Nonprofit Corporation – Accepted across the United States and can operate in any state, subject to state and local regulations.
- Nonprofit LLC – Only accepted by a few states, such as Minnesota, Kentucky, North Dakota, and Tennessee.
Let us dive deep into these two structures:
What is a Nonprofit Corporation?
A nonprofit organization that is registered as a corporation is the most common type in the U.S. today. It is accepted by the IRS as a legal entity, and hence, can accept donations and claim tax exemptions. Moreover, it is a separate legal entity with a board of directors. Also, it must comply with federal regulations and the IRS rules.
What is a Nonprofit LLC?
A nonprofit LLC is relatively rare and is accepted only by four states. It often exists as a subsidiary of a single tax-exempt organization, provided it meets the requirements set forth by the IRS. Given that this is a relatively new structure, there are no clear precedents, and hence, choosing this structure can make it difficult to obtain a tax-exempt status.
Manay CPA specializes in nonprofit organization structures and can help you better understand if a nonprofit LLC will fit your purpose.
Major Differences Between a Nonprofit LLC and a Nonprofit Corporation
Let’s now move on to the key areas where the two organizations differ:
Legal Standing & Tax Exemptions
The legal standing varies based on the state in which the nonprofit is incorporated. Moreover, the IRS has laid down 12 rules that a nonprofit LLC must follow in order to be eligible for tax exemptions.
Overall, nonprofit corporations tend to have broader acceptance and clearer pathways to tax exemption, but nonprofit LLCs may offer flexibility for certain missions and structures. The choice depends on your specific circumstances.
Aspect |
Nonprofit Corporation |
Nonprofit LLC |
| 501(c)(3) Status | Can apply directly, making them eligible for tax exemptions. | Must be wholly owned by a tax-exempt nonprofit. |
| Recognition | Widely recognized across all U.S. states. | Currently, North Dakota, Minnesota, Tennessee, and Kentucky explicitly allow this structure. Some states, like Texas, permit LLCs with a nonprofit purpose, but use different terminology. |
Governance & Decision-Making
The nonprofit governance structures are also different for the two organizations, and these differences impact how management is formed and what powers they have to make decisions. Eventually, governance also has a direct bearing on the operations of the organization.
Aspect |
Nonprofit Corporation |
Nonprofit LLC |
| Structure | It is governed by a board of directors, and they are responsible for the operations, outcomes, and compliance with state and federal laws. | Governance can be by members or managers. There is no mandatory requirement for a board. As a result, organizations are more flexible. |
| Bylaws | The nonprofit corporation must create its own bylaws and monitor compliance with them. This is strongly encouraged for better accountability. | Though there’s no mandatory requirement for bylaws, many nonprofit LLCs have internal documents for governance, along with a founding or operating agreement — the latter generally is required. |
| Maintaining Records | The minutes of the meeting and other documents must be strictly maintained by the nonprofit corporation. It also helps with transparency and accountability. | Again, there are no rigid rules to be followed, though some states may require them to submit documents. |
Liability & Legal Protections
While both nonprofit organization structures provide liability and legal protection, the guidelines are less defined in nonprofit LLCs than in nonprofit corporations. Moreover, the guidelines for nonprofit LLCs can depend on the state laws, while for corporations, it is nationwide.
Aspect |
Nonprofit Corporation |
Nonprofit LLC |
| Legal Protections | There are clear laws that protect the board members and employees from personal liability. Also, there are established legal precedents to guide courts on the right course of action. | The laws are less defined and can depend on each state. Since this structure is not so common, legal precedents may not be available for every case. |
| Compliance | The nonprofit corporations must comply with the federal laws and procedures. The compliance is also monitored, reducing the chances of lawsuits. | The compliance procedures for nonprofit LLCs are less stringent. Also, they vary among the states that recognize them. |
Fundraising & Financial Support
As with other aspects, nonprofit corporations have an edge when it comes to fundraising because of an established framework and widespread recognition. Nonprofit LLCs may not always enjoy the same level of trust, especially from new donors. Also, they may be restricted to raising funds from within the state only.
Aspect |
Nonprofit Corporation |
Nonprofit LLC |
| Financial Reporting | These business structures must submit Form 990 to the IRS, listing their capital sources. This form provides transparency and accountability, which in turn, builds trust in the minds of donors. | A nonprofit LLC that is tax-exempt under 501(c)(3) must file Form 990 just like a corporation, although this status is very rare. If not tax-exempt, tax reporting documents will be filed according to the type of the LLC’s owner (1040, 1065, etc.). |
| Tax Deductions | Nonprofit corporations that meet certain criteria are tax-exempt organizations. This means they can offer appropriate tax deductions to donors. | The tax deductions are state-specific. Also, some states do not recognize this structure, which means that donors residing in such states may not get any tax relief. |
| Capital Access | Nonprofit corporations can raise capital from multiple sources, like grants. Also, they can raise money from any part of the country. | Nonprofit fundraising is difficult because the IRS and many states do not accept it. |
Thus, these are the key differences if you’re evaluating a nonprofit LLC vs a nonprofit corporation. For more specific questions, reach out to the experts at Manay CPA.
Evaluating the Pros and Cons of Each Structure
Before deciding on the right nonprofit organization structure, let’s walk you through the pros and cons of each nonprofit legal entity.
Why Choose a Nonprofit Corporation?
Here are some reasons to choose a nonprofit corporation:
- Due to the established framework and recognition, more donors will feel confident contributing.
- Access to multiple capital sources, like grants from foundations and government agencies.
- Donors can get tax deductions for contributions if it’s a 501(c)(3) nonprofit. In turn, this can attract more donors.
- High liability protection for directors, thereby increasing the chances of attracting talented people to the organization.
- As it’s a legal entity recognized by the IRS, its existence can be perpetual.
- It is recognized across the country and can get discounts on many goods and services.
Potential Challenges of a Nonprofit Corporation
The shortcomings and challenges of a nonprofit corporation are:
- It has to comply with many laws. For example, it must hold meetings at regular intervals, file Form 990 tax returns, and maintain records.
- The operational expenses will be high because they will need more resources to meet the legal requirements, like documentation.
- There will be rigidity in operations as the organization must follow the established laws.
Why Choose a Nonprofit LLC?
Some reasons to choose a nonprofit LLC are as follows:
- As they don’t have strict laws, they have greater flexibility in internal structure and nonprofit governance.
- A board of directors is not mandatory. Also, they do not have to follow strict regulations, such as holding meetings or filing reports. All of these can bring down operational costs.
- Operations are more flexible and adaptable to the goals.
- Like nonprofit corporations, they offer legal protection to the leadership and employees.
Still, nonprofit LLCs are less common and might be more suitable for organizations with specific operational flexibility needs. Your choice should align with your nonprofit’s goals and the regulatory environment in your state.
Potential Challenges of a Nonprofit LLC
Nonprofit LLCs are not so common, and this can lead to many potential challenges:
- It must be wholly owned by a nonprofit corporation to apply for 501(c)(3) tax exemption. Also, the IRS requires that the owner of a nonprofit LLC must be a 501(c)(3) organization to be considered for tax exemption.
- Limited access to capital sources.
- Not all donors may have the trust to contribute.
- Operations can be limited to the states that recognize this business structure.
- Laws vary greatly across states. Most states may not even recognize it.
Based on the above pros and cons, you can decide on the right nonprofit structure for your goals. Next, we will also look into some additional factors to consider while making this choice.
How to Determine the Best Structure for Your Nonprofit
While there’s no right or wrong structure, the choice depends on your purpose and preferences. To discuss more about these requirements, talk to the experts at Manay CPA.
Your Organization’s Purpose & Mission
Know what is the purpose of starting a nonprofit organization. Which area do you want to focus on? Accordingly, decide on the structure.
For example, if you want to operate across the country, a nonprofit corporation can work. On the other hand, if you’re into niche operations or want to operate in a specific state only, a nonprofit LLC is a better choice. However, the state must recognize this LLC.
State-Specific Regulations
Not all states recognize a nonprofit LLC primarily because of the IRS restrictions discussed earlier. In this sense, nonprofit corporations have an advantage because all states recognize them.
Tax Exempt Status & Compliance
If you want to offer tax exemption to your donors, go for nonprofit corporations, as they are 501(c)(3) organizations. However, you must follow the legal requirements, including tax filing obligations, as mentioned above. For nonprofit LLCs to qualify for tax exemption, they must follow the 12 rules laid down by the IRS, and just like nonprofit corporations, they also have tax filing obligations.
Management Style & Control Preferences
Nonprofit corporations must have a board of directors and clear processes for decision-making. However, a nonprofit LLC has no such restriction and offers greater flexibility in operations. Depending on your preferred style, you can pick the appropriate structure.
Funding Opportunities & Financial Sustainability
Lastly, nonprofit corporations have more funding opportunities across a wide geographical area. Also, tax exemptions are available for donors. A nonprofit LLC does not enjoy the same benefits and can find it hard to raise money.
Thus, these are the factors to consider while selecting a nonprofit structure. If you still have doubts, Manay CPA can help you with this decision-making.
Making the Final Decision – What’s Best for Your Nonprofit?
Before making a decision, understand the pros and cons of each structure and their implications for your purpose and operations. Accordingly, decide the right one for your business. In general, go for a corporation if you want a structured governance model with tax exemptions and the option to gain more funds through trust and visibility. A nonprofit LLC is a better choice if you have a specific mission and need operational flexibility to achieve it.While nonprofit corporations are the more widely accepted and supported model, especially for those seeking broad public funding, remember that the best structure depends on your organization’s mission, goals, size, and operational preferences.
If you’re unsure which structure aligns with your goals, schedule a free consultation with Manay CPA to get started.
