What Is the Difference Between an LLC Corporation and a Nonprofit Business Corporation?

The choice of a business form is important for a business owner and depends, in part, on the nature of the proposed business and the way the business plans to finance its activities. For businesses that seek to raise investment, pay out profits and engage in ordinary commerce, an entity like a limited liability company, or LLC, would work. For a business that wants to engage in charitable activities and solicit donations, a nonprofit corporation is preferable.

One of the key differences between an LLC and a nonprofit corporation is that the nonprofit might be able to qualify as a 501(c)(3) tax-exempt entity. This is an Internal Revenue Service designation that allows the corporation to avoid paying income taxes in recognition of its charitable purpose. An LLC carries on ordinary business, even though it may do some charitable works, and so it cannot qualify as a 501(c)(3) tax-exempt entity.

Most state LLC formation documents or articles of organization use the phrase “any lawful act or activity” as the company’s purpose. Although it can be limited by other documents, such as the operating agreement, generally this means that the company is able to do anything that does not break the law. A nonprofit corporation, on the other hand, needs to have a specific charitable purpose when it is formed, and it has to maintain that purpose every year of its existence.

An LLC is owned by members who purchase shares in the company. Depending upon the agreements among the members, the profits and losses of the company are distributed to each member in accordance with their ownership. A nonprofit corporation does not have shareholders or owners and does not distribute any profits. The money from donations pays employee salaries and funds the group's charitable purpose.

LLCs can be run like partnerships, where the members directly manage all business affairs, or like a corporation, where a board of managers runs the company and the members vote only on major decisions. Smaller LLCs may find a member-managed approach easier to handle, while larger LLCs can take advantage of the efficiencies of a corporate style organization. Nonprofit corporations are run by a board of directors, who appoint officers to manage the daily operations. The directors are the final authority, because a nonprofit corporation does not have shareholders.