Non profit vs for profit can be differentiated in this way; a for-profit organization's primary goal is generating profit whereas a nonprofit does not focus on profit and instead is dedicated to the promotion of a cause or standpoint. 3 min read Show
1. Nonprofit Characteristics Non profit vs for profit can be differentiated in this way; a for-profit organization's primary goal is generating profit whereas a nonprofit does not focus on profit and instead is dedicated to the promotion of a cause or standpoint. Nonprofit CharacteristicsPurpose A misunderstanding held by many people is that a nonprofit is not in a position to make a profit. This is not true. Like any business, the revenues must exceed the expenses to remain viable. As a nonprofit, its main focus is pursuing a purpose or cause that is beneficial to the public. Ownership Nonprofit organizations are not privately owned nor are they controlled by one person; they are owned by the public. Any assets held by a nonprofit are dedicated to the purposes of the specified charitable, literary, religious, or educational organization. Other property or equipment and cash are not allocated to a single person nor can they be used for anyone's private benefit unless fair market compensation is paid to the nonprofit organization. Control A board consisting of directors and trustees control the nonprofit with the sole purpose of ensuring the organization fulfills its goal/purpose. The board members work as a group, not as individuals. The benefit of this governing format means no one individual can control a nonprofit. Some states have rules in place governing the pay of the board of directors. In general, the board of director's members do not receive any compensation other than travel expense to and from board meetings. Accountability A nonprofit organization must file annual information returns with state and local governments. Nonprofits file Form 990 with the Internal Revenue Service (IRS), which reports the finances of the organization including the salaries paid the five non-officer employees earning the highest salaries. Since a nonprofit is owned by the public, Form 990 must be made available at the organization's website or headquarters. The State's Attorney General's Office has oversight of nonprofit organizations, which has the authority to take a nonprofit to court if necessary. Differences Between Nonprofit and For-Profit OrganizationsFunding A nonprofit organization usually seeks out private sources for funding such as:
A for-profit organization relies on different methods for funding its operations and projects. Examples of funding sources include:
Diversity of Audience The focus of a nonprofit is to deliver a message about a service, action, or product. Because they are not directly delivering a product or service, their target audience must be diverse to encompass the general public, corporate sponsors, donors, and volunteers. The organization must be precise in considering each segment of its audience to get the most in results. The for-profit organizations pinpoint and target specific audiences. Their goal is creating a base of consumers who will purchase goods or services to generate revenue. A for-profit has the ability to increase its offerings and its revenue by continually targeting new audiences. Leadership Nonprofit organizations are generally led by a board of directors who do not have any financial ownership of the organization. A board of directors has no set limit on the number of people who may be involved. While the goal of a nonprofit is not monetary, the board does have leadership meetings to discuss many topics that include financial concerns. Other topics open for discussion at a board meeting include areas such as:
The for-profit organization is just the opposite, with leadership responsibilities allocated to a few select individuals. This may involve individuals of a privately held business or a large corporation. Leaders have a financial interest, or stake, in the organization's financial success and often receive incentives such as profit sharing or bonuses. These individuals are primarily concerned with profits and increasing the organization's revenue. Organization Culture Nonprofit cultures are more community-oriented because financial gain is not the goal of those working for the organization. In contrast, for-profit cultures are driven by financial gain and focus on key performance indicators (KPIs). Taxation Because a nonprofit is registered as a 501(c)3 organization, it can provide services as a public good that do not require a portion of the earnings to be paid to the government. For-profit organizations do not benefit from tax exemptions and must pay applicable taxes. If you need help with a nonprofit vs. for-profit transaction, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
 When you’re starting a business, it’s likely you’ll hear the phrases “nonprofit” and “not-for-profit” thrown around. It’s also easy to assume these two terms mean the same thing. However, nonprofits and not-for-profits are business structures with different tax implications, governance and functions. Both of these entities contrast with for-profit organizations. Here are the ins and outs of what all these terms mean so you can figure out which structure is right for your new venture. [Read more: Getting Ready to Launch? How to Choose the Right Business Structure] What is a nonprofit organization?A nonprofit organization is one that qualifies for tax-exempt status by the IRS because its mission and purpose are to further a social cause and provide a public benefit. Nonprofit organizations include hospitals, universities, national charities and foundations. [Read more: Education, Partnerships and Community Are Essential to Nonprofit Success] To qualify as a nonprofit, your business must serve the public good in some way. Nonprofits do not distribute profit to anything other than furthering the advancement of the organization. As such, you will be required to make your financial and operating information public so that donors can see how their contributions are being used. An individual or business that makes a donation to a nonprofit is allowed to deduct their donation from their tax return. The nonprofit, likewise, pays no taxes on any money received through fundraising. What is a not-for-profit organization?Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization. However, not-for-profits are not required to operate for the benefit of the public good. A not-for-profit can simply serve the goals of its members. A good example is a sports club; the purpose of the club is to exist for its members’ enjoyment. These organizations must apply for tax-exempt status from the IRS, including exemptions from sales tax and property taxes. That also means that money donated by an individual to an NFPO cannot be deducted on that person’s tax return. Nonprofit vs not-for-profit organizationsThere are four key differences between a nonprofit and a not-for-profit:
Nonprofits are granted 501(c)(3) status by the IRS. NFPOs are also governed by IRS tax code section 501(c), but depending on their purpose they could fall under a different section, like section 501(c)(7). What is a for-profit organization?A for-profit organization is one that operates with the goal of making money. Most businesses are for-profits that serve their customers by selling a product or service. The business owner earns an income from the for-profit and may also pay shareholders and investors from the profits. Whether you decided to start a for-profit, not-for-profit or nonprofit, the first steps to creating your entity are the same. Start by filing for a business entity in the state in which you wish to run your operations. Your business entity might be a corporation, LLC, sole proprietorship or partnership. Once the entity has been formed, you will apply for an Employer Identification Number (EIN) with the IRS. It’s during this step that you will select your tax-exempt status using Form 1024 if you wish to run as a nonprofit.
Some businesses start as one type of legal entity and later decide to convert to another. Can you change your legal entity?Some businesses start as one type of legal entity and later decide to convert to another. This is possible, but it’s a little complicated depending on the types of entities involved. From nonprofit to for-profitThere are a few reasons why you may wish to change from a nonprofit to a for-profit. Maybe you believe you can get better access loans or other funding by becoming a for-profit. Or maybe you prefer to operate without the regulations that govern nonprofits. Regardless, once you’ve carefully considered this option and all shareholders are in agreement, you will need to notify the IRS by writing a "statement of nonprofit conversion." This statement will include:
You will also need to contact your state and local representatives to fill out any forms required in your specific jurisdiction. From for-profit to nonprofitConverting a for-profit to a nonprofit is a little more difficult, as the IRS wants to discourage businesses from making this move to avoid paying taxes. It can be done, however, through a process that isn’t so different from starting a nonprofit from scratch. “While you may be able to retain the for-profit organization name for use by your nonprofit, a nonprofit organization requires you to use the money you raise to suit a purpose other than distribution to shareholders or business owners, and it needs to fulfill the mission and goals of the nonprofit,” explained Small Business Chronicle. “Transitioning to a nonprofit organization requires you to do some planning prior to registering the nonprofit with the state in which it operates.” This transition includes writing a mission statement, establishing bylaws, and filing articles of incorporation with your Secretary of State, among other things. It’s at the articles of incorporation step that you will need to let the Secretary of State know you’re keeping the same name as your existing for-profit. Which legal entity is the best?Ultimately, the legal entity that’s right for your business depends on your goals. As one entrepreneur, Jane Chen, outlined in Harvard Business Review, there are pros and cons to each entity. “A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected,” she wrote. “A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally expect a ‘social return’ on capital.” There’s no one-size-fits-all when it comes to establishing a legal entity for your business. And, the good news is you can always change your entity as your business grows. Speak to an expert who can help you choose an entity that optimizes your tax deductions while serving your overarching goal. CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation. Follow us on Instagram for more expert tips & business owners stories. To stay on top of all the news impacting your small business, go here for all of our latest small business news and updates. CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here. Published April 20, 2021 |
What is the difference between a for-profit organization and a nonprofit organization?
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