Whether you are thinking of starting a new non-profit or have been invited to sit on the Board of an existing charity, it’s important to know the key differences between for- and non-profit businesses – and it’s not as simple as you might think!
Legal Entity – A for profit business can take many forms – sole proprietorship is most common but you can also choose partnership, corporation or the hybrid legal form, the limited liability company / partnership. A non-profit will always be a corporation. Paperwork is filed not only with the state, but with the IRS which determines whether the corporation meets one of the many sections of the 501(c) code which governs non profits. Most charities you’re familiar with – American Red Cross, Cancer Society, Catholic Charities – fall under 501(c)3.
Ownership – The reason a non-profit is always a corporation is because no single person owns a non-profit. A for profit corporation is owned by shareholders but a non-profit is “owned” by the community it serves. The Board of Directors for a non-profit serve as volunteers and ensure that the entity remains true to it’s charitable mission. The Board of Directors in a for profit corporation consists of major stockholders and those elected by stockholders. They serve as compensated representatives of the stockholders who ensure the entity produces a reasonable return on investment.
Purpose – A non-profit serves a public good and is driven by the mission. For example, a suicide prevention non-profit might have as a mission, “to help prevent suicide and offer support to those who have lost someone to suicide.” Revenue is generated to support services which are designed to accomplish the mission. A for profit business serves a private good and exists to return a profit on the investment of the owner(s). For profit businesses often generate public benefit as well but that is not the motivating factor for owning or investing in a for profit business.
Revenue – A non-profit may generate revenue by delivering good or more often services but the revenue generated is subsidized by donations, grants or government contracts. Many nonprofits deliver a service for which there is great public benefit but no profitable market either because the people they serve lack the financial means to pay what the services cost or because the benefit is diffused among society as a whole (environmental or civil rights charities for example). A for profit business charges a fee for the goods or services that fully covers costs plus a reasonable profit.
Costs – A for profit business will incur all of the normal costs associated with doing business in the industry it serves. A non-profit is exempt from many costs as a public investment in achieving its charitable purpose. Non profits are exempt from some Federal taxes and most state taxes. Donations to charitable non profits are tax-deductible and people who support the mission are not only allowed but encouraged to work as volunteers – something the Labor Department would otherwise not allow.
Profit – Any money left to a business after paying all expenses is left to the discretion of the owners in a for profit business. Earnings may be paid out or retained against anticipated future expenses. In a non-profit, revenue in excess of expense may be retained if such “carry over” is not prohibited by the source of the funds. Restricted funds may only be used as the donor directs, where unrestricted funds may be used at the discretion of the Board as long as the use furthers the mission.