For Profit vs Non-Profit Form of Business
94For profit and not for profit (or non-profit) businesses are similar in many ways. Both are generally corporations in which assets are held and business transacted in the name of the corporation rather than the individuals involved. To survive and grow, both need to generate or bring in more revenue than they spend on operations. Both are involved in producing a good or service for society. And, of course, both are managed and run by the people who are employed by the corporation.
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Differences Between For Profit and Not For Profit Businesses
The first, and most important difference between a for profit and non-profit business is the profit. As mentioned above, both have to generate a profit in order to survive and grow. Both have to generate money to pay their bills and, if the corporation is to acquire new assets and grow it needs profits both to use for this as well as to attract new investment (in the case of a non-profit, new investment takes the form of contributions from people or other corporations and people are just as reluctant to contribute money to a failing charity as they are to invest in a bankrupt corporation). In both cases some of the profits are re-invested in the organization (although laws, especially tax laws, place limits on how much non-profits are allowed to re-invest) either to replace aging and worn out assets (buildings, machinery, etc.) or to acquire new assets needed to expand the organization's operations (such as a religious group building a new and larger church to accommodate a growing congregation). However, it is the distribution of the remainder of the profits that is one of the differentiating characteristics between for profit and non-profit organizations. In a for profit organization the profits that are not re-invested in the organization are distributed to the owners of the corporation as cash. In the case of a non-profit organization the profits are used to provide goods or services to the group or groups the non-profit was formed to help. A religious organization may use the profits to help its members or others obtain food, medical care, education, etc. A university may use its profits to provide free or low cost education to some or all of its students. The point is that the profits of a non-profit organization always go toward supporting some cause that society deems as good and beneficial and not into the pockets of the investors.
The second difference, which explains the first, is ownership of the corporation. A for profit corporation is created when investors get together and transfer assets, money and/or talent to start the corporation. The corporation, which is actually a fictitious person in the eyes of the law, takes title and ownership of the assets, etc. and gives, in exchange for the assets, ownership shares in the company to those who contributed the assets. However, with a non-profit, individuals come together and provide assets, money and/or talent to start the corporation. But, these people who create the corporation do not receive any legal ownership in the corporation and, further, have no guarantee that they will be able to retain control of the corporation once formed. All of the assets are now to be used to advance that cause or provide the service for which the non-profit business was created as determined by the corporation's board of directors.
The composition of the board of directors is the third major difference between for profit and non-profit businesses. In both cases the original board is created by the same people who started the corporation and, in both cases, directors are given fixed terms. Things change when it comes time to re-elect or replace these board members. In the case of a for profit corporation each share of stock entitles its owner to one vote and owners of multiple shares have multiple votes. It is possible for the person or group owning 51% or more of the stock to control both the board and the business with their controlling votes. In the case of a non-profit corporation there are no shares and thus no owners of shares to vote. When a board member's term is up it is the remaining board members who decide to either re-elect that person to a new term or replace the person. (in organizations which have a defined membership, it is usually the members who elect the board but here each member only has one vote and membership does not give them an ownership right in the assets of the organization in the sense that they can sell it like a stock holder in a for profit corporation can sell their stock and the rights that go with it). It is the board of directors or members which makes the decisions and runs the corporation.
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Goal of For Profit Business is to Make Money for Owners
For profit business generally have a single focus and that is to make money for their owners. Non-profits are more varied. Some are pure charities which are created solely to give money or services away to those in need. Churches and other charitable organizations are examples of this type of non-profit. Other non-profits are merely an efficient way for a group to accomplish a goal that is not directly concerned with making money for the members. An industry trade association would be an example of this. The goal is to promote the industry thereby increasing the sales, and profits, of the member businesses. However, the trade association itself is not designed to generate profits to be distributed to its members.
Business is concerned with the management of resources to meet society's needs and, since society's needs are numerous and varied, the tools used to accomplish this are also varied.
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profit or nonprofit - I suggest you check with your tax accountant or the IRS as to whether or not you have to pay taxes on your income from your Medicaid billings.
I do business with medicaid, they are non profit but am a profit organization. I bill weekly for services offered to the eldery and the money gets deposited into my bussiness account do I have to pay taxes on the $ I'm billing for? super confused
Very informative site Chuck. I had a follow on question. I run a website Youngzine that brings current events to children 9-14 -- explains things to them and helps them understand the interconnected of the world we live in.
If we wish to approach organizations for grants, is it better to structure ourselves as a non-profit? Or can for profits also apply for grants as long as the amount is being used to grow the organization?
Thanks for the info. I have a daughter with a terminal illness. Having gone through so much and seeing the difficulties others have has inspired me to want to help. Want to have teen outings, donate school supplies, bring fun activities to kids while hospitalized and eventually a scholarship to help ease college students' expenses. Not sure what kind of non profit to start (Foundation/Charity Organization). I would like to administer it myself along with my daughter and possibly another family member. Which direction, in your opinion, is best to achieve our goals?
Non-profit organizations have a big role to play, especially as governments reduce spending. But what oversight is there to prevent organizations from becoming non-profit just to avoid paying income taxes? Also, what impact do non-profits have on tax-paying organizations? A non-profit music festival could out-compete a for-profit festival, for example. Being a non-profit means you're expected to return value to the community. But who is the judge?
Thanks for a helpful hub, Chuck!
Nice and useful information and I think that every businessman must be able to differentiate between profit and non-profit organization and understand the difference between them. However, in my opinion, there is no business organization without any profit motive whether it is in monetary form and in some other form.
I am interested in starting a group home for teens and I am undecided on whether it should be for profit or non profit. I want to be able to benefit from having the buisness ...any suggestions?
Kendall - thank you for visiting my Hub. As to your question, if you are asking if the board is limited to one person the answer is no. The board is a group that is established to oversee and direct the organization.
However, if you question is can only one employee/manager of the non-profit be on the board that would depend upon the by-laws governing the non-profit. Generally some members of management are on the board but in some cases they are non-voting members. The best thing to is check the rules and regulations of the state in which the non-profit corporation is chartered and also consult with an attorney when setting up your non-profit corporation.
Great info ...thank you. Can there only be one member on a non profit board?
Your hub is very informative!
An often missed topic, most presume it’s obvious to understand the differences but there are many things that people wouldn’t consider.
nice..??
Thanks Chuck for the easy to understand info. I am going to from a non profit and need to learn as much as I can. This was very helpful.
Tweeted and bookmarked!
Great article. You have done a great job of weeding out the "fluff" and just presenting the cardinal points.
Thank you!
-Finnegan
Great hub. Social entrepreneurship is a topic more people need to talk about.
I am a member of a small non-profit group of women golfer's at a Counrty club, we pay our dues each year and make a budget at the begining of the year and distribute the money throughout the year in different events held at the Counrty Club for that year. Our by-laws say that we can only have $100.00 left in our account at the end of each year, but over the past 20 or so years as new member's join through the year the budget does not reflect their money and we have had extra left at the end of each year, to the tune of about $3,000.00 as of today in a surplus account. How do we as the new board take that money and put it back into or budget so it all looks right on paper?
Very nice hub, thanks for sharing
The informaton provided me a general reference point with which to start a dialogue with a tax attorney.
Indeed I have much to think about but, at least now I am 50% certain which path I'll be taking.
It seems non-profits have attracted much attention from individuals with experience and training in for profit businesses. As someone who has been involved with non-profits for 20 years I have seen the consequences of individuals trying to apply for profit business principles to non-profit practices. These include very different philosophies, values and ethics. More often professional service providers in non=profits have very different ethical standards than business professionals. The previous comments demonstrate the lack of understanding of ethics in non-profits as it is missing in the article and posts. It would be good for anyone interested in non=profits to do their homework on the role of ethical practices in non-profits as lack of understanding can mean failure regardless of good intentions.
I need this information. Thanks!
My question should, perhaps, constitute a separate question/response, but, here it is:
If you have worked solely for npos for 20 years, what change of mindset/point of view - other than the material one - is needed when entering the for-profit world? After 20 years, you have npo outlook running in your bloodstream. Is that at all clear? Can this be cured? Thank you.
Vanessa peters - I suggest you consult with a lawyer and look into starting both a for profit business and a non-profit business.
The for profit business would charge fees for your services and be run with the goal of making a profit.
The non-profit would be used to solicit tax-deductible donations from businesses and others and the funds raised used to pay for or subsidize your tutoring services for those in need. In essence the non-profit would be a customer of your for profit business as it would be paying for services your for profit business would provide to people who needed such services but could not afford them.
This is the way I think it could be done. However, would defiantly employ the services of a good, and reputable, tax attorney and probably a good account/tax adviser as well because you could find yourself in a lot of trouble if this is not set up and operated correctly. Professional legal advice and guidance is required here.
Good luck!
I am a private reading activist and tutor and plan to seek income from community donations from private individuals and businesses for tutoring services and training seminars. I'm leaning toward becoming a for profit business. What is the likelihood of receiving after-tax donations from businesses?
good article for our research on thesis mode :)
thanks for sharing this
Excellent article! I've been researching which type of business(profit/non) would be more appropriate for my mobile hot food vending/after hours "soup kitchen" and you clarified the owner/employee status... Now, I know exactly the information I need to request from the Florida Division of Corporation! :)
Indeed, this was a good article. The profit really tells what business you are into.
calvink45 - First of all, I think that you should seek the advice of an attorney or other expert source regarding the laws regulating corporations and LLCs (both for profit and non-profit) in your state. Such a person should be able to answer your questions regarding the rules concerning the composition of your board of directors.
As for paying yourself, it wouldn't make any difference whether you organize this as a corporation (for profit or non-profit) or simply a sole proprietorship as you have to pay income taxes on all of your income. Organizing as a for profit corporation or LLC there may provide some tax advantages for you as well as limiting possible legal liability.
Finally, simply donating a percent of the revenues of your business to a charity generally won't qualify your business as a non-profit (although it could provide an income tax deduction for you or your business).
Given the questions you asked in your comment, I strongly urge you to seek some expert advice on starting and running a business before deciding on what type of business organization you want to choose.
Hi Chuck,
I'm stuck, i don't know if i should do a non or profit business. Lets say im the guy that started this non_profit can i be the only board of director? can i not have them decide my future? i prefer just being the only Boss. If my non_profit company is making tons of money not by doations but by the product that i sell on my website can i pay myself for the sucess or do i have to donate a % to the charities? thanks chuck
Michael - I think you need to see a lawyer with expertise in this area.
My brother and I formed an organization last year called Cigars For Good (www.cigarsforgood.org). It is set up to act as a not for profit organization but we were recently turned down by the IRS with regard to our non-profit status.
What options do we have left to pursue? Do we become a foundation that gives out grants? How do we need to proceed forward with regard to paperwork and direction?
We have long term goals of: 1.) hosting events to raise funds to be given out to charitable organizations, 2.)online website sales in order to have more money to give out, 3.)have a bank account/checking...
Any help would be great.
Thanks,
Michael Williams
Julie - you can double check with your lawyer but as I understand it, since this is a non-profit corporation you are not an owner so you cannot simply take money out of the corporation to pay yourself. As I see it you have two options. First you can be hired as an employee of the corporation and given a job title (which could be director) and salary both of which should be authorized and approved by the Board of Directors. In the absence of other management, you would serve at the pleasure of the Board and, in the absence of an employment contract, could be let go at any time. The second option would be for you to set yourself up as an independent consultant (either as a sole proprietor, as owner of an LLC or owner of a Chapter S corporation and then have your company contract your services to the non-profit corporation. Again, it would be up to the Board to approve and renew the contract periodically but, assuming in both cases the corporation can afford it, either as an employee or independent contractor you would be paid.
Good luck.
We have a 501c3 organization. It is a theatre company with mission statement to provide discounted theatre to seniors with disabilities, alzheimers, or financially unable to go out to theatre. So far every penny has gone in to the business but I really need to make some kind of living for my 60 hours a week. The bylaws allow a salary of 25,000. Can I pay myself instead of all the money raised going back into the business?
Hi Chuck,
Thanks so much for this great article. My query is on professional management of non-profit organizations. With special interest of the planning function of managemnet, what would you say are the differences or similarities between planning in profit versus non-profit organizations.
Thanks very much
forwardpayer - Your question is a good one and is important because you are not going to be able to get the organization through the start-up process if you don't have any means of support for yourself.
My gut feeling is that this may not be legal and, if legal may raise questions among donors.
My recommendation is to first check with you lawyer and/or tax accountant (both would probably be best) for possible legal or tax problems. Then check with your board, or trusted advisers if you haven't put the board together yet, for their take on how this, if legal, would look to potential donors.
Good luck with your project.
Chuck
Hi Chuck,
Great article and follow up. Is it possible for management of a newly established non-profit organization to draw a salary while continuing to raise funds (accept donations) during the development stages of the organization? I am wanting to start a NP venture, however I need to be compensated so that I can continue paying bills, mortgage etc. Who determines management's salary?
Thanks for the help!
Chuck...you rock!!! Thanks for all the useful info. I'm starting a non-profit and these are the things i need to know
There must be a major change of mindset before anyone can start a business. No point thinking like an employee in own business.
Kapitall - Interest rates are the cost of borrowing money. As such, the main function of interest rates is to allocate a scarce resource which, in this case, is loanable funds.
In addition to the pure cost of money aspect of interest rates which is determined by supply and demand (historically this part of an interest rate has averaged around 2%) interest rates also reflect the risk on the loan. A high risk borrower pays a higher rate than a low risk borrower because the chances of default among high risk borrowers is much higher than with low risk borrowers. Because of this, high risk borrowers pay a higher rate and this higher rate portion of the interest rate goes to offsetting the losses resulting from the higher default rate for this class of borrowers.
In the absence of the government nationalizing the banking system and using their power to tax to raise funds to loan, the result of such a system that you propose would be a large decrease in lending and/or schemes to get around the rules.
Raising rates on any group, rich or poor, will reduce the demand for loans by that group. While lowering the rate for any group will result in an increase in demand for loans by that group. At the same time, high rates will result in an increase in supply of loanable funds being made available while low rates will reduce the supply of loanable funds.
In the scenario that you are suggesting, we would have a surplus of loanable funds for those who could afford to pay higher rates as lenders (which include you and I and everyone else who puts money into a bank savings account, mutual fund money market account, invests in bonds, etc. expecting to get a return on our money) will rush forward with funds to loan while wealthier borrowers will reduce their borrowing.
In the case of the low rates for those who can't afford higher rates the opposite will be true absent subsidies by government which raises funds through forced taxation or charitable organizations who generally specify specific uses for money given to those for whom they are offering a subsidized rate.
Lenders and borrowers will also try to find ways around these obstacles to rates that can be charged. In the case of households and businesses that can afford higher rates, a business could set up a marginally profitable wholly owned subsidiary to borrow for them (some large companies do something similar to avoid the high mandatory cost of government run unemployment insurance by using one subsidiary to hire people and pay the high premiums for layoffs while keeping rates low for the company as a whole). Households could do the same thing in cases where there is a large difference in income between the two spouses. In this case they would have separate credit and finances with the lower income spouse doing all the borrowing while the higher income spouse owns all of the income producing assets.
Lenders could also try to get around the rate limits by charging higher loan origination fees, higher late charges, stiff pre-payment penalties, etc. to lower income borrowers while doing things like offering higher rate borrowers a longer term than requested and then giving a rebate for paying early, etc.
Do you think the borrowing system should be the other way around? (People/companies who can afford to pay a higher rate will pay it, but people/companies who can't afford a high rate will pay less.) Or do you think the riskier the loan the higher the rate?
Very imformative hub Chuck, I have been involved in both non-profit and profit organisations and both has it pros and cons, but both require lots of time and effort. Thanks again
Regards
Neil Ashworth
Great Hub! Here's one of mine: http://hubpages.com/hub/gossiptraps
Aya Katz - I don't know what is involved with the reporting requirements for non-profits as I have never been involved in preparing these reports. I would think that the complexity would vary with the size and scope of the organization but I don't think that it would be any more complex than for a for profit corporation of similar size. Of course, the regulator requirements will vary from state to state and this can be more complex in one state than in another.
Are there any other hubbers who have experience in the details of financial and other regulatory reporting for non-profits that can elaborate on this?
Chuck, I've heard that reporting requirements for non-profits are very difficult to meet, expecially if you don't have the income to hire a CPA. Is that true?
Keith, Thanks for your comment.
Pay, including CEO pay is a business expense, not profit. Some non-profits that generate high revenues do use them to provide high compensation to their top management. This may be good or may be bad depending upon how effective the CEO is in raising money for the organization.
The question that has to be asked is are the revenues being diverted to high executive salaries and thus not being used to support the stated mission of the organization or, are the high salaries being used to attract people who are able to greatly increase revenues so that the organization has more money for its mission?
A non-profit CEO being paid $450,000 is earning ten times what one making $45,000 per year is paid. But if the CEO with the big salary is bringing in ten times more donations, then the organization has a lot more money to spend on its mission so the extra salary is worth it.
Non-profits have to publish their financial statements and it is always a good idea to take a look at them to see what their overall ratio of expenses to contributions is. If a small percent of contributions goes to expenses it is an indication that the organization is well run while if a very large percent of the contributions go to expenses then this is probably not a good place to contribute since most of each contribution will go to overhead. Instead of focusing on CEO salary only, look at the revenue to expense ratios and how they are using the money they collect before making a judgment about how the organization is operated.
Thanks again for the comment.
I have been influenced to believe that a CEO of a Mers Goodwill makes more than 450,000 annually. Can this be possible based on how the profits are to be distributed.
Cellar Door - I'm glad you enjoyed this Hub and found it informative.
In answer to your question the "profit" (which for non-profit accounting purposes is usually referred to as the "surplus") that non-profit corporations need to make can be used in a number of ways.
Ideally, it should be used to help the target population that the non-profit was set up to help in the first place. While legally these organizations have to use the surplus to help the target group, "help" can be a broad term. The first thing to understand here is that, since there are no stock holders or owners of any other type, there is no way profits can be distributed to investors or owners as with a regular corporation.
Also, tax laws in must jurisdictions set additional limits on what the surplus can be spent on and how much of the surplus can be banked as reserves.
Depending upon the mission of the non-profit, the first place the surplus funds can be spent would be to increase the amount of cash or in kind aid (such as food, temporary housing, medical assistance) to the target group in the case of non-profits, like the Red Cross, United Way, certain religious charities, etc., whose mission includes helping disaster victims. Major disasters, like the typhoon that hit Asia a couple of years ago, Hurricane katrina, the 9/11 attack always bring a big influx of donations into these organizations, but initially the organizations have to dip into their reserves for their immediate response. Other non-profits, such as religious organizations, whose main mission is not direct disaster aid, will also dip into reserves to assist with major disasters.
Greater surplusses also allow a non-profit to increase the numbe of people in the target audiance they can help. In some cases this is simply a case of having more funds to hand out to a larger group. A non-profit that collects food for people in need can use the surplus to buy more food to deliver to more needy people.
They can also use the funds to increase their facilities and infrastructure. Rather than more food which it can't use due to the physical size of their facility, a soup kitchen may invest the surplus in buliding a larger structure or in adding additional table, ovens, etc. so as to be able to accomodate more people.
Increased facilities can also include more amenities for workers and management. This can be a little more difficult to justify because the amenities may simply be an added benefit for the workers, management and donors with no discernable benefit to the target group it is helping or it can be a tool to better motovate the workers and management to provide more and better service as well as inspire existing and new donors to contribute more.
Plush offices for top management along with high salaries for those at the very top (salaries and wages for the regular workers in non-profits are traditionally below average while it is not uncommon for people at the very top of the organization to have compensation that is close to that of their counterparts in the for profit sector). Sometimes this is strictly a case of top management using the non-profit as a vehicle to enrich themselves while most other times it is usually a case of doing what is needed to bringin more money for the mission. After all, if the non-profit can recruit a top executive who can tripple or quadruple the funds raised by offering that person twice the salary that such executives normally receive it can be seen as a good investment in terms of money raised for the mission. This is why it is a good idea for individuals considering donations to non-profit charitable organizations to study them before making their contributions in order to make sure that most of the money you are contributing goes to helping the target group and not simply enriching the top management of the charity. There are a number of organizations that study non-profits and provide this information and I have seen more than one Hub (although I haven't bookedmarked them so can link to them here) which describes and provides links to such oversight organizations.
Thanks again for your comment and question.
Chuck
this is so clear, nice one. so if i understand right, non-profits also look to make a decent profit, how exactly do they draw the line, because if they are looking to cover costs and break-even, is this majorly affected by workers wages in the company?
CD
Hey what a great hub loads of great information very well layed out will be back to see more hubs from you well done
For Profit vs Non Profit Form of Business
it Was very well written, I support you, welcome to my hub
I've sold to non-profits but have never been involved with them otherwise. I assumed that they were run similarly yet different and had different tax breaks but I never put much thought into it beyond that, for example how the board is handled.
Thanks for expanding my knowledge.
Very enlightening hub. Thanks for the information
Nice hub !
Another differnce is the complexity of the tax filing and the penalties are higher for a non profit. Feel free to check out my blog and post a comment with any questions you have:
This depends with amount of capital you have, if its a parthnership or a company, alot has to considered. There4 anyone who needs be successful has to take your findings and apply them. Like the first difference was very clear because one makes abusiness with a goal which is profit. There4 the strategies you make should favour the limits.
Great Hub. Nice information. Thanks for sharing it!
Chuck;
This is a good topic. Thanks.
I look at the difference between a nonprofit and a business as - the business can take out profit from the corporation, but a nonprofit can't. You are so right that both rely on income exceeding expense. Nonprofit sure doesn't mean negative profit or net loss. In a tough year like this, though, we see a lot of that. The first thing to go, unfortunately is charitable donations.
A nonprofit operates according to the charter it files with the IRS, and it determines its board rules which vary widely. That is assuming you are talking about the typical charity or 501 (c) (3). Foundations and churches are another thing altogether.
Nice hub - I have linked one of mine on a similar topic to it or you
Nicely done! So much to learn from both types!
Nice hub,
In the end there is profit from non profit
Very informative. Thanks
Good article. I just started a non-profit foundation with a group of people. There is so much to learn!!! You presented it in a nutshell very well. Filling out the paperwork is so time consuming. Our foundation deals with providing technology to the blind and visually impaired, as well as other disabled people.
Now I need help with Grant paperwork! :)
Sandi
James 6 months ago
working threw the paper work to start a non profit.
our mision statement is to provide housing, food, and clothing to the homeless, domestic violance victimes, people with Aids, and the disable.
what about the salary of the people who are on the board.
we want to set up a modest salary for me and my husband.
we just want around $40,000 a year for the both plus the over head of a small office in our town.
how do we set this up