When most people think of a business, a for-profit organization comes to mind. But, what about nonprofit organizations? What’s the difference between the two? How are they similar? How are they different?
This article will explore the similarities and differences between for-profit businesses and nonprofit organizations in order to help you make an informed decision about which type of business you want to start.
Purpose
The first and most obvious difference between a for-profit business and a nonprofit organization is the purpose for each. The primary purpose for a for-profit business is to generate revenue for the owners and shareholders. On the other hand, the primary purpose for a nonprofit business is to achieve a charitable mission or goal, such as providing education or medical care for those in need. A nonprofit organization does not generate revenue, rather nonprofit organization business structure is based upon gifts and/or donations.
Funding
For-profit businesses are typically funded through investor capital, loans, and revenue from product sales or services. Nonprofits are usually funded by corporate or government grants, donations, and other charitable giving. The revenue earned by for-profit businesses is distributed to its owners and shareholders in the form of dividends. The funds generated by nonprofit organizations must be used to further the organization’s mission or goals.
Tax-Exempt Status
A key difference between a for-profit business and a nonprofit business is the tax status of each. A for-profit business is not eligible for a 501(c)3 federal income tax-exempt status, which means the organization will pay all federal and state taxes on corporate income. Nonprofits, on the other hand, can apply for and receive 501(c)3 tax-exempt status from the IRS. This means they are not required to pay federal taxes on the donations received by the organization.
Target Audience
The target audience for a for-profit business is typically those consumers who are willing to pay for the products or services offered by the business. The target audience for nonprofits is usually donors who are interested in supporting the organization’s mission or goals. Donors can include individuals, corporations, or charitable foundations.
Leadership
The leadership of a for-profit business is typically focused on generating revenue to build profits that support the corporation. The leadership of a nonprofit corporation is focused on furthering the organization’s mission or goals by increasing gifts and donations to sustain the organization.
The leadership of a for-profit typically includes a board of directors, a CEO, and other executive officers. The leadership of a nonprofit organization typically includes a board of trustees or directors, a president or CEO, and other executive officers.
Staff
The staff of a for-profit business is usually focused on maintaining organizational strength by generating consistent or increasing revenues for the business. The staff of a nonprofit organization is usually focused on furthering the organization’s mission or goals by leading volunteers and garnering gifts and donations.
Employees of for-profit organizations are paid a salary for their work. Employees of nonprofit organizations may or may not be paid for their work. Volunteers are often used to supplement the staff of nonprofits.
Culture
The culture of for-profit businesses is typically focused on gaining leadership roles and generating revenue for the corporation. Meetings, teamwork, and collaboration are often geared toward these goals. The culture of a nonprofit corporation is typically focused on furthering the organization’s mission or goals, whether it be through direct service work or fundraising.
Ownership
For-profit corporations have many models of ownership. The structure of the organization may be a sole proprietorship, partnership, limited liability company (LLC), or a C or S corporation. Furthermore, some companies are owned by individuals, some are owned by a handful of shareholders, and others are publicly owned.
Nonprofits are typically organized as corporations or trusts. They may also be organized as unincorporated associations. Nonprofit organizations are not owned and they do not have shareholders.
Accountability
A for-profit business is held accountable to the owners or shareholders. The organization is required to make decisions that will increase profits for these individuals. Nonprofit organizations are held accountable to their donors and the general public. They are required to make decisions that further their mission or goals.
Both for-profit businesses and nonprofits are subject to state and federal regulations. However, nonprofits are often given a federal tax-exempt status, as a 501(c)3 corporation, which may entail additional regulations from the IRS.
Conclusion
As you can see, there are several key differences between for-profit and nonprofit organizations. These organizations differ in their purpose, funding, target audience, leadership, staff, culture, ownership, and accountability. It’s important to understand these differences before you decide which type of business is right for you.