How to Start a Nonprofit LLC for Social Entrepreneurs

What types of nonprofit structures are there?

Nonprofit founders can typically choose among three business formations when establishing their organization. Each works differently and offers different benefits.

Low-profit limited liability company (L3C)

Low-profit limited liability companies or L3Cs are designed to help founders bridge the gap between traditional for-profit organizations and nonprofit tax-exempt organizations. The goal of these companies is to achieve a signifiant charitable or educational purpose, not to maximize profits.

L3Cs function similarly to traditional LLCs, but they’re only available in select states. As of 2025, nine states currently authorize L3C formation: Vermont, Michigan, Wyoming, Utah, Illinois, Louisiana, Maine, Rhode Island, and North Carolina.

Each of these states has specific requirements and fees associated with forming an L3C. While the core concept of prioritizing a charitable purpose remains consistent, it's crucial to consult the specific regulations in your chosen state. Generally, you'll need to:

• Verify statutory purpose. Ensure your L3C's articles of organization explicitly state that its primary purpose is charitable or educational, and that profit generation is incidental.
• File articles of organization. Submit articles of organization (or similar formation documents) with the relevant state agency (usually the Secretary of State), specifically indicating that you are forming an L3C.
• Adhere to naming conventions. Some states may have specific naming requirements for L3Cs, such as including "L3C" in the business name.
• Pay filing fees. There will be state-specific filing fees, which can vary.

Always check with the Secretary of State's office or a legal professional in your chosen state for the most up-to-date and precise requirements.

Nonprofit LLC

A nonprofit LLC is a traditional LLC formed by a nonprofit tax-exempt entity or tax-exempt organization using a charitable or social mission as its core purpose. These LLCs can be formed even if the organization isn’t pursuing 501(c)(3) tax-exempt status with the Internal Revenue Service (IRS). 

Nonprofit LLCs differ from traditional LLCs in several key ways.

• Mission-driven purpose: While a traditional LLC typically operates as a for-profit entity, a nonprofit LLC is established with a clear, defined social, environmental, or charitable mission at its heart. This mission is often embedded in its operating agreement and articles of organization.
• Asset lock: Some nonprofit LLCs may include "asset lock" provisions, meaning that assets cannot be distributed to members upon dissolution but must instead be transferred to another charitable organization. This protects the organization's mission and assets from being exploited for private gain.
• Funding opportunities: While not eligible for all the same grants as 501(c)(3)s, nonprofit LLCs may still be able to access specific grants or impact investments that prioritize mission-aligned entities over purely for-profit ventures.

A nonprofit LLC provides liability protection for its owners, similar to a traditional LLC, but with a foundational commitment to social good that guides its governance and operations.

501(c)(3) corporation

These corporations are only available to charitable and social entrepreneurship organizations with mission-driven purposes. The goal of these businesses is to spread their mission, not to profit as much as possible. 

501(c)(3) corporations are also granted tax-exempt status by the IRS, meaning that the IRS won’t collect taxes on the earnings of the corporation. However, to maintain that tax-exempt status, companies must be set up exclusively for one or more exempt purposes. This includes 

• Charitable organizations
• Some educational institutions
• Religious organizations
• Some scientific organizations

Any profits earned by the corporation, either through donations or business activities, must be invested back into the corporation. 

How do funding options differ for social enterprise LLCs?

Nonprofit LLCs and low-profit LLCs can be funded in the same ways that corporate tax-exempt nonprofits are, including:

• Grants. This type of funding is money awarded by the state, federal government, or a private foundation to a social enterprise.
• Sponsorships. Social enterprise organizations can request corporate sponsorship from other for-profit businesses and organizations.
• Donations. Individuals and businesses can donate to the organization. These donations can be financial contributions or in-kind donations.
• Fundraising events. Nonprofit and low-profit organizations are allowed to host fundraising events to raise money for their organizations and causes. The money raised can be used for the organization’s operations.

You can also borrow money from lenders if needed. Just be sure to only borrow what you can afford to repay. Borrowing too much or taking on loans with payments you can’t make in full each month could get your nonprofit into trouble. 

How to form a nonprofit LLC: Step-by-step guide

These are the steps you’ll need to take to form a nonprofit LLC. 

1. Choose the right type of nonprofit LLC

The type of LLC you form for your nonprofit largely depends on where you’re based and where you’re forming the LLC. If you’re planning to form your LLC in Vermont, Michigan, Wyoming, Utah, Illinois, Louisiana, Maine, Rhode Island, and North Carolina, you can choose to form an L3C. If you aren’t based out of one of those nine states, you’ll need to choose a traditional LLC. 

Keep in mind that you can still form a traditional LLC and pursue nonprofit status with the IRS. 

2. Figure out your mission statement

As a social entrepreneur, you should have a clear vision of what your organization will do and what it stands for. This is your mission statement, and you’ll need to include it in your articles of organization and operating agreement. 

Take some time to think about what your organization does and what your core mission is. Try to sum it up in a few sentences if possible. 

3. Pick your nonprofit’s name

Before you can form an LLC, you’ll need to choose a name for your nonprofit. The name you choose should be memorable and, ideally, aligned with the cause you’re advocating for. Keep in mind that your name should be unique and not similar to other organizations and businesses in your area.

4. Pick a registered agent

Your nonprofit will need to appoint a registered agent to receive legal documents and notices for your organization. You can act as your own registered agent, but doing so may not be in your best interest. Registered agents must be available to receive legal documents during regular business hours each week. Using a registered agent service means you’ll always have someone available to receive important legal documents on your behalf, even if you’re working at an event or aren’t in the office.

5. Prepare your articles of organization

Your articles of organization serve as your registration with the state. You’ll need to file your articles of organization with your Secretary of State. You should be able to file online or by mail, but check with your state for the most updated information.

Your articles of organization should include key information about your nonprofit or low-profit company, including:

• The organization’s name
• The address of your LLC’s main place of business
• The duration and purpose of your nonprofit LLC
• Your registered agent’s name and contact information
• The signature of your nonprofit LLC’s organizer or organizers

6. Create an operating agreement

Your operating agreement explains how your nonprofit or low-profit organization will run things. Though you’re not required to file your operating agreement with the state in most areas, creating one can help ensure that everyone is on the same page and give you a solid framework to keep things running smoothly and consistently as your business grows. 

Your operating agreement should include:

• Your nonprofit’s name
• The main business purpose or mission for your nonprofit
• The management structure you’ll follow
• How your organization will be taxed

If you’re not sure where to start, consider letting a professional draft an operating agreement for you.

7. Get an employer identification number 

When you form a nonprofit LLC, you’ll need to request an employer identification number (EIN) from the Internal Revenue Service (IRS). This number helps the IRS identify your nonprofit when you file returns for federal income tax purposes each year, hire employees, and engage in other similar activities. You can request your EIN from the IRS for free or let someone request it on your behalf if you’re using an LLC formation service like LegalZoom. 

Once you have your EIN, you should also open a dedicated business bank account at the bank or credit union of your choice. This helps separate your nonprofit’s finances from your personal finances, making it easier to maintain your tax-exempt status and track your nonprofit’s finances. 

What ongoing compliance is required for mission-driven LLCs?

First and foremost, mission-driven LLCs must continue to focus on their charitable or mission-driven purpose. This means you’ll need to continue supporting your mission or cause year after year. If you shift your focus toward earning a profit, you’ll likely need to restructure your LLC as a traditional LLC and could lose your tax-exempt status with the IRS.

In addition to maintaining your mission, you’ll also need to:

• Report your income. Nonprofit organizations are still required to report their earnings to the IRS and the state. This helps you maintain your tax-exempt status if you have it.
• Avoid participating in prohibited activities. Nonprofit LLCs cannot excessively lobby political organizations or participate in political campaign activities (beyond what’s considered reasonable). 
• Maintain public financial support. To maintain your charitable status, your nonprofit LLC must receive at least one-third of its financial support from public sources like tax-deductible donations. 
• File annual reports. Nonprofit LLCs are still required to file annual reports with the Secretary of State and must pay all required fees.

If you don’t stay in compliance, you risk losing your nonprofit status and, in some cases, may have to pay penalties.

When would a social entrepreneur choose a traditional LLC instead? 

Choosing a nonprofit LLC or an L3C can be a good choice for many mission-driven organizations, but it’s not the right fit at all times. These structures require strict compliance and force your organization to focus almost exclusively on your mission. If you want to shift your focus toward generating profits while still supporting a cause you care about, pursuing a traditional LLC may be a better fit. 

Forming a traditional LLC could be beneficial if you want: 

• The ability to focus on financial returns. Traditional LLCs give you more flexibility to focus on earning a profit rather than solely supporting your mission.
• An opportunity to be more appealing to traditional investors. Many investors prefer traditional LLCs over nonprofit and low-income LLCs because they stand to earn higher returns. Nonprofit business entities looking to attract investment opportunities may want to consider a normal LLC.
• Easier compliance. When you form a traditional LLC and operate as a for-profit entity, you won’t have to worry about proving your low-profit or nonprofit status every year. 

Consider speaking with an attorney before you choose the type of LLC for your nonprofit. This will help you make sure you’re setting your organization up in the best way for your long-term goals, whether that’s creating a nonprofit LLC that earns much of its money through tax deductible donations or a traditional LLC that gives you a bit more flexibility.

It’s also a good idea to speak with a tax professional. They can explain the tax implications of a nonprofit, nonprofit LLC, and a traditional limited liability company, so you can better understand your options.

How LegalZoom can help with your nonprofit LLC

With LegalZoom’s LLC formation services, you can get your LLC set up faster and reduce the risk of errors delaying your formation. It takes just three easy steps.

1. Choose your package. LegalZoom’s LLC formation service starts at $0 plus filing fees. Consider how much of the formation you want to handle yourself, and choose a package that fits your needs. 
2. Enter your information. Fill out a simple questionnaire telling us about your business and your cause.
3. Let us file your documents. LegalZoom will file your documents on your behalf, and once your LLC is approved, we’ll send you the finalized paperwork. 

Nonprofit LLC FAQs

Do I need an LLC to start a nonprofit?

You don’t need to start an LLC to start a nonprofit, but doing so could help reduce your liability and may make it easier for you to protect your personal assets if anyone sues your nonprofit. If you don’t want to form an LLC, you could consider forming a nonprofit corporation.

Can I pay myself a salary in a nonprofit LLC?

You can pay yourself a salary if you’re working for your nonprofit LLC. However, the amount you pay yourself should be reasonable based on the nonprofit’s financial situation. You can also only compensate yourself for the work you do for the nonprofit business entity. 

Can a small business be a nonprofit organization?

Small businesses may function as nonprofits if they meet the IRS guidelines outlined in Internal Revenue Code 501(c) that explains what a nonprofit organization is. This means they should not focus solely on profit generation and should instead focus on the mission or cause they support. Profits must be invested back into the nonprofit and cannot be distributed to shareholders, owners, or other key stakeholders.