Nonprofit and for-profit organizations are two of the most common types of organizations in the public and private spheres. Both differ greatly when it comes to their standardized practices, operational objectives, sources of funding, leadership structure, and employment. To understand both structures better, let’s examine their key distinctions in more detail.
Definition of Nonprofit and Profit Organizations
As the name implies, for-profit organizations operate with the sole purpose of generating income. The most common form of entity geared towards yielding a profit is retail, specifically selling goods or providing services. Owners of for-profits have a share in the company’s revenue, though its size and the method of distribution depends on the underlying business structure of the for-profit.
Nonprofits, on the other hand, exist predominantly to further a social cause. As such, they exist for the betterment of the community at large. The focus of a nonprofit could be environmental activism, medical relief, humanitarian aid, and other activities aimed at conflict and crisis resolution.
Unlike profit organizations, the concept of ownership does not apply to nonprofits in the same way as they don’t work shares, percentage interests, or stocks. So while a for-profit is considered successful when it meets certain revenue goals and shows consistent growth in capital, nonprofits focus on attaining the goals of their specific mission.
Another widespread type of non-stock organization is the not-for-profit—not to be confused with nonprofits. Not-for-profits don’t have to work for the advancement of any public cause and are typically formed for personal non-commercial use such as local sports clubs. Any profit an NFPO makes is used for sustaining the company.
Although the terminology implies a lack of profit for non-stock entities, nonprofits are in fact allowed to earn money. When a nonprofit is legally organized as a specific business structure, for instance, an LLC or corporation, it can naturally generate revenue through its activities. What matters is what the company does with this yield, and nonprofits are meant to exist for the betterment of the community regardless of its scope.
Nonprofits are usually funded through sponsorships, private contributions, grants, and more recently crowdfunding.
As a general rule, NGOs are public property, a concept expressed specifically through public asset ownership, meaning there can be no single private owner or multiple shareholders. That said, these companies can be established as private foundations. All securities made available for an NGO have to be utilized for charitable or other non-profit causes. Other property and assets that have no specific allocation cannot be used for paying the board of directors or any other managerial body involved in the company’s management. One exception would be that of fair market value compensation, which is negotiated beforehand.
As per the IRS classification, nonprofits are typically sorted by categories, 27 in total, all designated as 501(c) organizations with further designations applied based on their activity. You are likely familiar with the 501(c)(3) nonprofit type that describes charities, public safety groups, educational, literary, and religious foundations, animal cruelty prevention groups and child protection organizations.
These NGOs are exempt from income tax, but so are most contributions made in their name. As tax-deductible entities, nonprofits file taxes on Form 1023 except for churches. The process also differs depending on the type of nonprofit—the IRS takes into account various aspects of a nonprofit’s operation such as political activity.
Differences Between Nonprofit and For-Profit Organizations
For-profits are predominantly commercial entities that exist for making a profit regardless of the core business structure—it could be anything from a corporation and general partnership to a limited liability company or an entire series.
By definition, nonprofits are designed to serve the public good. Although an NGO can function as a business, its ultimate goal is to work for the public benefit, whether it’s by providing aid directly or promoting social causes and helping raise funds.
Given that for-profits work toward making revenue, the workplace culture, as well as the business framework itself, focus on the financial aspects of the company’s operation like expansion strategies, KPIs, product and service improvement for the purposes of increasing the revenue.
With nonprofits, most short- and long-term goals are less concerned with revenue and focus more on achieving specific goals related to each given cause or project as well as the advancement of the organization’s mission. That’s why it’s not uncommon for NGO staff to continue their activism off-work.
The ownership of for-profits is usually financially-motivated. When it comes to leadership, companies that focus on bringing in revenue are owned by a group of individuals, meaning the organization’s assets and profits are distributed among the key participants. It could be members that hold a percentage interest in an LLC, shareholders of a corporation, or even a sole proprietor. Having a stake in a for-profit company typically gives the individual the right to make administrative decisions, receive a share of the total revenue, and direct the funds for the commercial growth of the company.
Nonprofits, on the other hand, are usually managed by a board of directors. The group is responsible for guiding the organization, but the members do not make any profit individually. While the leadership may still discuss finances and earnings, the main agenda will always concern public and environmental interests.
Companies that engage with commercial activities rely on paid workers to conduct various business operations. Nonprofits tend to enlist volunteers who will often act as representatives of organizations for recruiting new members or bringing more investors on board.
Business ventures are commonly funded through local investors and bank loans upon the initial formation. After that, the owners may also use the profit yielded by the company to support its growth.
Most nonprofits obtain the necessary funding by way of corporate sponsorship or by working with private donors. Some organizations are also eligible for government grants.
For-profit organizations are required to pay taxes on whatever profits they make. The taxation system varies based on the business structure. For instance, LLCs are generally exempt from federal income tax but still pay various sales taxes in their home states. By contrast, nonprofits are not required to pay tax on whatever profit they make from services rendered. All contributions to the organization are generally tax-deductible.