Five-minute general counsel: choose a nonprofit entity
I recently got an inquiry for someone with an unusual entity selection question. Here it is:
“I am in the process of creating a non-profit. Can you please tell me whether you think a non-profit should be an LLC or Corp… and why?”
Now, this person didn’t just pull my name out of a hat; they’d done research and found an answer I’d written on a very similar question about creating a nonprofit with a Corp or LLC.
Typically a corporation makes the most sense. The reason that LLCs exist is to combine certain tax benefits of partnerships with the limited liability of corporations.
While it is true that there are theoretically reduced management “burdens” for an LLC, not only are most of those irrelevant in the nonprofit context but they can actually be counter-productive. The typical best answer is for a board to oversee the nonprofit with clear instructions about their role and responsibilities, as well as clear guidance from the courts and the IRS and state attorneys general about how those responsibilities are enforced.
I suppose there are specific situations where an LLC might make sense, such as with a pure private foundation, or a supporting organization, i.e., in cases where there is no need to have full oversight. But those are not the typical scenario.
I want to register my business name through the state of California, but got stuck on whether or not to file as a corporation or LLC. I want to be the owner/director myself and I want to be able to apply for grants and do a fundraising event, accept donations in the future, and be able to get sponsors or raise money from venture capitalists.
My first thought was that the questioner had more than a couple steps between where she was and the issue she raised. First off: consider what your nonprofit organization should look like. I started here because the ideas of “grants” and “donations” and “raising money from venture capitalists” generally don’t belong in the same sentence. From that starting point, perhaps the founder either needs to form two separate entities, one for-profit and one nonprofit, or go back a step and think about why this business exists, how it takes in capital, what it does with those funds, what happens to any money left over, and then decide, based on those answers, what form this forthcoming organization should take.
After thinking through those questions, the next step is forming the nonprofit.