If you want to help fix the world, forming an organization is often more effective than going it alone. The classic approach is to form a nonprofit organization, but a socially conscious, for-profit limited liability company (LLC) can also make a difference. A nonprofit LLC isn't usually an option. Instead, you have to choose LLC versus nonprofit.
Most states don't allow nonprofit organizations to form as LLCs. It's also difficult for an LLC to qualify as a tax-exempt charitable organization. However, a for-profit LLC can devote itself to charitable causes that benefit the community.
As the name suggests, a limited liability company shields its owners from legal liability as a corporation does, but an LLC is simpler to set up. Unlike a corporation, an LLC cannot sell stock, which limits its ability to grow. There's no corporate tax on an LLC. The income passes to the owners, who pay tax on it as personal income.
A typical nonprofit organization is a corporation that applies to the IRS for 501(c)3 tax-exempt status. You can run a nonprofit without incorporating it, however. What matters is that the money the nonprofit makes or raises goes to serve its mission rather than enriching the owners or founders.
In theory, there's no reason an LLC can't be nonprofit. In practice, however, only a few states allow LLCs to form with a nonprofit mission. Usually, you have to choose between forming an LLC vs. a not-for-profit corporation or an unincorporated nonprofit structure.
When weighing the LLC vs. nonprofit question, it's important to remember the difference between nonprofit organizations and tax-exempt organizations. Although the two often overlap, they aren't interchangeable.
A nonprofit is an organization devoted to a public purpose, such as education, free medical care, or spreading the gospel. It also includes fraternal organizations such as the Shriners and professional fellowships such as the American Medical Association. A tax-exempt organization has registered with the IRS. It's exempt from paying tax, and donations to the group are tax-deductible.
Some nonprofits don't meet the IRS standards, so they aren't tax-exempt. It's also possible to be tax-exempt without being a nonprofit. An LLC that devotes its income to tax-exempt purposes and whose owners are all 501(c)3 organizations could qualify as tax-exempt, even if state law doesn't allow nonprofit LLCs.
When weighing the choice of nonprofit corporation vs. LLC, it is worth considering social entrepreneurship as a possibility. Social entrepreneurs form for-profit companies but use them to advance the public good as well. A socially conscious LLC could have a mission similar to a nonprofit organization.
For example, a socially conscious LLC might arrange micro-loans that conventional banks wouldn't bother with. It might guarantee to pay its suppliers above market rates or sell medical care or equipment at affordable rates. This approach has pros and cons compared to conventional nonprofits:
- You're not dependent on donations to fund your operations. Potentially there's no limit to how much revenue you can generate.
- A socially conscious corporation can raise money by selling stock, which isn't an option for a charitable LLC.
- Unlike with a 501(c)3, you have to pay taxes.
- Usually, you won't qualify for government and charitable grants to fund your operations.
Unless you're in a state that allows nonprofit LLCs, you have to choose between nonprofit status and operating as an LLC. If your primary motive is to help your community in some way, think about whether a for-profit, socially conscious LLC will do better or worse than a nonprofit.
Suppose your priority is expanding sustainable, organic agriculture in the U.S. As a nonprofit, you could raise donations to provide training in sustainable agriculture and help with promotion and branding for farmers who participate in your program. As a for-profit business, you could buy seeds or environmentally friendly farm chemicals and sell them at affordable prices.
The decision may hinge on where you and your partners' strengths lie, or it may be as simple as whether you can raise more money on a for-profit basis than by asking for donations.