Which One Do I Need? Legal Entities v. Tax Elections

Are you ready to set up an entity for business or non-profit work? Filing the right paperwork is essential. So is selecting the right tax structure to fit your enterprise. Is it a for-profit venture? Charitable organization or political entity?

Knowing which one you need is critical.

• Legal entities are corporate structures set up at the state level. They are distinct from the organization’s tax election

• Tax elections determine how the legal entity is taxed. This can include tax-exempt status.

  • Employee Identification Number can be filed as:

    • LLC

    • Partnership

    • S-Corp

    • C-Corp

    • 501(c)(3)

    • 501(c)(4)

    • Or otherwise

While a legal structure and tax election are a must, there are options in how to create the best structure for your organization. A hybrid option might be fitting. 

LLC + 501(c)(3) is a common choice. You need the LLC or other entity selection as the legal structure, and in many states, a nonprofit designation. This is still different from your tax election, which is filed with the Internal Revenue Service (IRS) after your legal entity formation is approved. 

For non-profits, a Fiscal Sponsorship structure can be a good option to advance the mission:

• An LLC taxed as a 501(c)(3) gets both state and federal tax exempt status, among other benefits, particularly in grant funding

• Fiscal Sponsorship allows for partnership with a larger, more established organization to provide administrative and financial management support for a newer, smaller organization

  • This is often for a designated amount of time, to get the new organization up and running, before spinning off on its own. 

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For more, book time with us to discuss your legal structural options and filings. 

** Unless you’re 100% certain about your tax election, be sure to discuss your tax election options with your CPA, as they’ll know your full tax picture to help make a decision.