An organization can choose to either be a nonprofit, or select one of several types of for-profit structures, including the limited liability company. A state must specifically allow investors to form an LLC in a state and must approve the LLC application. Nonprofits qualify for tax exemptions that an LLC does not receive, but there are also limitations on a nonprofit's spending and political speech that do not apply to an LLC.
A nonprofit does not have to break even or operate at a loss and can still earn income. The nonprofit has to invest its income back into the organization or give it away to another charity and may not distribute any of these earnings. An LLC earns a profit and distributes the money to its members. The LLC has more flexibility than a corporation when it distributes money to its members and does not have to give each member a distribution of earnings that is proportional to each member's share of ownership.
Read More: How Do I Convert From a Nonprofit to an LLC?
A nonprofit must incorporate to qualify for tax exemptions, according to California State University, Dominguez Hills. Incorporated nonprofits have governance requirements that do not apply to an LLC. An incorporated nonprofit must appoint a board of trustees, hold meetings and keep records of meeting minutes to keep its tax exemptions. A limited liability company does not need to have a board of directors and conduct regular meetings, unlike a corporation. The LLC is cheaper to manage because the officials do not need to pay for regular board meetings and easier to set up because an incorporated nonprofit has to submit documents to the state to prove that its managers intend to provide a public benefit.
A nonprofit company has no shareholders' equity. The people who fund the nonprofit are donors and do not have any ownership rights in the nonprofit, and if the nonprofit closes, it has to give away all of its assets. A limited liability company does have ownership shares and if it disbands, each member will receive some of the company's assets.
The purpose of the nonprofit is to provide a service to the public, and the purpose of an LLC is to earn a profit for its members. Nonprofits can still buy and sell stocks and trade other investments, but the intent of their tax exemption is that they will use their revenue to provide something that helps the public, such as a university, a museum, a zoo or a park. The IRS can take away a nonprofit's tax exemption if the nonprofit isn't using its income to benefit the public.
Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.