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There is a lot that goes into starting an organization, regardless of it's tax filing status. In the most basic terms, a nonprofit is a legal corporation that is granted tax-exempt status by the Internal Revenue Service, or IRS. To make things even more straightforward, the difference between nonprofit businesses and for-profit businesses is this:
A for-profit organization's primary goal is generating profit. In contrast, a nonprofit does not focus on profit. Instead, it is dedicated to the promotion of a cause or standpoint.
A misunderstanding many people make about nonprofits is that nonprofits don't make any profit. This is not true. Like any business, the revenues must exceed the expenses to remain viable. However, the income a nonprofit earns go back into running the nonprofit. As a nonprofit, the company's primary focus is pursuing a purpose or cause that is beneficial to the public.
Nonprofit organizations are not privately owned, nor are they controlled by one person; the public owns them. Any assets held by a nonprofit are dedicated to the purposes of the specified charitable, literary, religious, or educational organization. Now, this doesn't mean a nonprofit doesn't own the building it runs out of or the cars it uses for transportation. It means that the nonprofit isn't holding onto a property for the sole purpose of investment, or they aren't purchasing employees' Rolex watches. Other property or equipment, as well as cash, are not allocated to a single person, nor can they be used for anyone's private benefit.
A board consisting of directors and trustees control the nonprofit with the sole purpose of ensuring the organization fulfills its goals. The board members work as a group, not as individuals, to oversee all functions of the nonprofit. Since a nonprofit is designed to benefit the public, this board should be representative of the community it serves. This governing format of a board ensures that no one individual can control a nonprofit, and it always acts in the community's best interest.
A nonprofit organization must file annual information returns with state and local governments. Nonprofits file Form 990 with the IRS, which reports the finances of the organization, including income, expenses, and salaries paid to any employees of the nonprofit. Not filing the proper paperwork can result in losing nonprofit status.
A nonprofit organization usually seeks out private sources for funding, such as private donations of time and money, government grants, corporate sponsorships, and crowdfunding. On the other hand, a for-profit company relies on different methods for funding its operations and projects, such as bank loans, sales generation, and investors.
Similar to a for-profit company, nonprofits often sell products, services, or put on events to earn revenue. However, a nonprofit is still going to put the profits back into the organization rather than use the profit for employees' gain.
In for-profit organizations, investors are usually looking to get a return on their investment. Typically, an investor may want a 20-25% in return for their investment and sometimes more depending on the amount of risk involved.
In nonprofits - investors are called donors, and what donors receive is the manifestation of the mission. Their "return on investment" is the fulfillment of the nonprofit's mission. Founders of nonprofits will typically be the primary funder for the first 5+ years. While the founder can "loan" the nonprofit their salary or put their own money down, putting a young nonprofit in debt is not typically a good idea.
The focus of a nonprofit is to make an impact on a community or cause. Nonprofits want to deliver a message about service, action, or a product. They may sell products or services to a specific audience and, therefore, are targeting a particular customer, but they are ultimately using the profits to serve a community. A nonprofit cannot change who they are serving without changing its mission entirely.
For-profit businesses have a different strategy: to pinpoint and target specific audiences who are the most likely to purchase their good or service for the highest amount. Their audience can change with industry trends or technological advancements. Their goal is to create a base of consumers who will buy products or services to generate revenue. A for-profit can increase its revenue by fine-tuning its audience and demographics.
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. However, it is recommended to have 3-5 board members, and stay away from even numbers.
While the goal of a nonprofit is not monetary, the board does have leadership meetings to discuss many topics that include financial concerns. Nonprofits still have operating costs, missions, and plans that the board oversees.
A for-profit organization has an entirely different style of leadership, with responsibilities allocated to a few select individuals. These individuals have a financial interest or stake in the organization's economic success and often receive incentives. While a nonprofit still may give bonuses to its employees, you won't see the highest-earning sales rep getting a new Mercedes. The executive team of businesses are primarily concerned with profits and increasing the organization's revenue, rather than the impact the company has on its community.
Nonprofit cultures are more community-oriented and focused on giving rather than taking. Instead of focusing on how to earn more profit, they are focused on how to increase their impact. Working for a nonprofit generally means you are committed to the community they belong to, and the mission of the nonprofit.
In contrast, for-profit cultures are driven by financial gain and focus on key performance indicators. While a for-profit organization may still give back to the community or donate a portion of its proceeds to charity, it isn't the companies sole mission.
A nonprofit registers as a 501(c)3 organization and, in doing so, proves it can provide services as a public good. The earnings from these services are not taxed. For-profit organizations do not benefit from tax exemptions and must pay applicable taxes. However, for-profit organizations can get tax breaks from donations or giving to charitable organizations.
A foundation is a nonprofit organization or charitable trust whose purpose is to give the money to charitable organizations. Foundations often have a mission, like giving scholarship money to local high school students, advancing science, or helping protect wildlife.
Starting a foundation may be a good option for you if you want to run a profitable business while also giving back to your community. However, it is not best practice to lead the board of directors of your foundation. Just like a nonprofit, it is best to have a diverse board to allocate funds while carrying out the foundation's mission.
Private Foundations: These foundations usually receive their funding from an individual, business, or estate. Private Foundations are required to give away a specific portion of their assets every year. They file as a 990-PF and are required to release who they gave grants to every year. You usually see this done in the form of an Annual Report.
Grantmaking Public Charity (Public Charity): These charities often get their funding from many different sources, including businesses, individuals, corporations, grants, and government agencies. A majority of community foundations are public charities. Public Charities file as Form 990 and are not required to release their grant information annually, though they usually do.
Hopefully, this answers some of your questions about the differences between nonprofits and small businesses. The bottom line: the two business structures are regulated differently, and nonprofit organizations do not make profits, unlike small businesses.
Something to note here as well is that just because an organization is for-profit doesn't mean it isn't giving back to its community. Businesses can often get a bad reputation for focusing solely on profiting from the communities they belong to. However, there are plenty of companies that give back to their community. A company that wants to raise awareness for a cause may register as a business because they didn't want to worry about keeping a board of directors organized or the managing reporting that nonprofits require.
Starting or running a business does not mean you are giving up the chance to give. It merely means that you are choosing an organization model that has different reporting requirements and structure.
Nonprofit status may be an excellent fit for an organization whose services are geared towards lower-income populations, or there is a need without the resources to pay for it. One advantage of a nonprofit is that you can apply for grants and funding that typical businesses can't. However, many of these grants and funding exist because the nonprofits would not be able to survive without them.
For more information on nonprofits and foundations, or if you need help deciding if you should start a business or a nonprofit, please visit nonprofitnetwork.org. Nonprofit Network has spent over two decades serving the diverse needs of nonprofits. They improve the impact and performance of fellow nonprofits by working alongside leaders to create high-quality strategic solutions that advance their missions in our communities.
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