Limited Liability Company or Non-Profit

There comes a time when sole proprietors must make a decision about how to register their company when they start growing. This is an important consideration, because having the right organization will enable the company to experience even more profits, and in some cases, protection against law suits.

When writing a business plan, one of the most important considerations is type of business organization to adopt for the company. The benefit of the non-profit organization is the ability to raise money from donors and not have to pay income or property taxes. Money is used to expand the company or to pay for its expenses. The non-profit organization does not issue shares of stock to its owners and does not have shareholders. The government tends to limit the amount of money a non-profit organization can make and monitors the organization through stringent reporting.

The limited liability company, on the other hand, is an unincorporated association. It has certain characteristics of both a corporation and a partnership or sole proprietorship and provides limited liability to its owners. The benefits of creating a limited liability company is that is flexibility in this type of organization, as a clause can be added to modify the agreement (“unless otherwise provided for in the operating agreement”). For income tax purposes, the entity is treated as a pass through entity. Some limited liability corpoation comanies include lawyers and attorneys who often operate as partnershps, such as McGladrey & Pullen LLP, one of the largest accounting firms in the country.

For example, owners of the corporation can raise money by selling shares of company stock. There is a greater potential for more income compared to a non-profit organization, as there are no limitations to the amount of money one could raise. There can be one or multiple members of the LLC. If there is one owner, the person would report the income on their tax return. However, if there are multiple members, they must file a form 1065 for income tax purposes and each one receives a form K-1 for reporting on their own income taxes.

The members may elect to be taxed as a corporation where the dividends earned from the shares and the distribution of the dividends would be taxed as they are received by the members.

The members may elect, instead, to be treated as an S Corporation, where there would be self-employment tax savings.

Advantages:
1. Less paperwork and record keeping than a C-corporation,
2. Members are taxed on their profits individually
3. Members can decide how they want to be taxed, i.e., sole proprietor, partnership, S- corporation, or C-corporation
4. There is no double taxation unless the members elect to be taxed as a C- corporation,
5. LLC’s are treated as a separate entity in most states,
6. Only one natural person is required to set the business up as an LLC,
7. There is more protection against a “hungry investor”

Disadvantages:
1. If there is no agreement between the members, there could be a problem. To avoid problems, the members must outline their governance and protective provisions in an operating agreement or similar governing document.
2. It may be difficult to raise money as investors may be more comfortable with the corporation and IPO (Initial Public Offering) as a way to invest money. If that is the case, the owner(s) may elect to dissolve the organization and reform under a corporation.

If business owners are unsure of the type of organization which is beneficial for them, they should consult their attorney.

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