Do you know the differences between incorporation and LLC for non-profit organizations? Your choice should depend on the business’s nature and size, tax considerations, and management preferences.
Corporations generally follow formalities, such as maintaining specific records, keeping minutes, and holding regular meetings. Limited liability companies have minimal paperwork and formal requirements, making them straightforward and ideal for small businesses.
Are you an entrepreneur seeking the differences between incorporation and LLC for non-profit organizations? This article explained both entities to improve your knowledge. Let’s get started.
Corporation vs. LLC
Limited Liability Companies (LLCs) and Corporations are different legal business structures with pros and cons. Below are the key differences:
Legal Structure
Corporation: A corporation is a legal entity different from its shareholders or owners. Entrepreneurs create it by filing articles of incorporation with the state.
LLC: As a hybrid legal entity, a Limited Liability Company combines elements of partnerships and corporations. It offers liability protection to its owners and allows flexible taxation and management.
Limited Liability Protection
Corporation: A corporation’s shareholders can protect their personal assets from the company’s debts. Their liability has limitations to their contribution to the business.
LLC: Shareholders of an LLC enjoy limited liability, protecting their personal assets from the online company formation legal obligations and debts.
Taxation
Corporation: The internal revenue service can tax this entity as C or S-corporation. C-corporations remit payments at the corporate level, and shareholders also pay on dividends received. It’s called double taxation. S-corporations transfer the losses and profits to the shareholders.
LLC: The Company formation online is considered a “pass-through” entity for tax reasons. The profits and losses go to the members, who remit payment on their personal tax returns.
Management and Ownership
Corporation: This entity has a more rigid management structure, including shareholders holding stock ownership, managers running day-to-day operations, and a board of directors overseeing significant decisions.
LLC: Limited liability companies offer management flexibility. Shareholders can appoint managers to handle operations or manage the organization themselves with a marketing strategy. It has a membership-interest-based structure.
What is a non-profit corporation?
A non-profit corporation is a legal structure popular among non-profit organizations. It’s formed under a country or state’s laws, rules, and regulations and operates for a specific purpose or mission, benefiting communities or the general public.
Religious groups, educational institutions, and charitable organizations often use these corporations. Requirements in most states include the drafting of corporate bylaws and electing a board of directors.
Furthermore, online registration companies owners and members must ensure compliance with internal formalities, such as recording meeting minutes and engagement. Most non-profit organizations apply for the 501(c) (3) status with the IRS for tax exemption after incorporation.
A non-profit corporation’s characteristics include the following:
Legal Entity: The Corporation is a legal entity different from its members, directors, and founders. It can own property, conduct business, and enter into contracts in its name.
Non-profit Status: These companies exist to serve purposes different from profit-making for their shareholders or owners. Instead, they further its mission by reinvesting surplus funds into the organization.
Tax-Exempt Status: These corporations can apply for tax-exempt status with the government. They’re exempt from certain income taxes, including assets and donations.
Governance: Non-profit corporations usually have a board of directors responsible for managing company activities and legal obligations.
Fundraising: These companies rely on various funding sources, including fundraising events, grants, and individual donations.
What is a non-profit LLC?
Non-profit limited liability companies are entities designed as not-for-profits for tax purposes. Establishing an LLC might seem the best business structure for a new non-profit. Below are essential factors to consider:
State law
Entrepreneurs establish an LLC through state law and must comply with rules and regulations. Your purpose for forming the company is one of the essential provisions. Although some states allow you to choose between a not-for-profit or non-profit purpose, others require a lawful objective.
Other state LLC laws and provisions could challenge the non-profit, especially if the organization wants to claim federal tax exemption as a 501(c) (3) company.
Federal law
After overcoming the state LLC regulations, you must apply for 501(c) (3) status. A limited liability company can be recognized as tax-exempt under federal tax laws due to the following occurrences:
If a 501(c) (3) organization sole member owns the company. The LLC income goes through the tax-exempt sole member, and the organization serves as a disregarded entity.
If two or more 501(c) (3) organizations own the company. It’s then considered a pass-through entity and functions like a partnership.
It files Internal Revenue Service Form 1023 for exemption recognition under section 501(c) (3).
The IRS treats a limited liability company that files Form 1023 as a corporation instead of a partnership. An LLC shouldn’t file an exemption application to enjoy the tax-exempt benefit associated with disregarded entities.
The differences between incorporation and LLC: Wrapping up
After learning the differences between incorporation and LLC, ensure the best practices to succeed. Limited liability companies have a suitable legal structure for different businesses, and non-profits can benefit.
As always, consult financial or legal advisors to determine the appropriate structure for your business. Your goals, specific mission, and needs are excellent considerations for your non-profit organization.
Additionally, regulations can change over time, so regularly verify the most recent information about non-profits legal structures in your jurisdiction.
