You’ve got a great idea for a brand new endeavor. You know your community needs it—and you know they’ll love it!
But… how do you know whether to start a nonprofit or a for-profit business??
What’s the difference, anyway?!
What Is a Nonprofit Organization?
A nonprofit is an organization that has been classified as tax-exempt by the US Internal Revenue Service (the IRS) because it serves some kind of public good.
But nonprofits can vary widely in their mission, focus, and structure. Examples include neighborhood youth programs or local arts organizations, as well as historical sites, large national charities, wealthy foundations, universities, hospitals, and many more.
Nonprofits must meet a need and serve the public good in some way. All funds raised must be used to further the mission of the organization. Because of this rule, a nonprofit’s financials must be made publicly available, and they must be transparent. A nonprofit’s board and leadership must be prepared to account for every dollar spent.
Nonprofit vs. Not-For-Profit… What’s the difference?
While often used interchangeably, the terms “nonprofit” and “not-for-profit” have different meanings.
They are similar structures in that all dollars raised or earned through donations or services provided are kept within the organization and used for its advancement.
Not-for-profits, however, have no requirement to benefit their community or serve a public good—they can simply exist for fun, entertainment, or camaraderie.
Clubs or membership associations are good examples; no one is making money from these organizations, but they are not necessarily serving the community. They exist for the enjoyment and access of their members.
How Is a For-Profit Business Different Than a Nonprofit?
The purpose of for-profit organizations is in the name—they exist for profit. Owners of these businesses have a stated goal of making money.
Profits earned by the business are distributed amongst the owner(s), staff, and any shareholders the company may have.
Nonprofits and for-profits both have required paperwork that must be completed and filed annually, though the specifics vary from entity to entity.
At a Glance: Nonprofit vs. For-Profit
One of the biggest differences between nonprofits and for-profits is the why behind the entity’s existence. Nonprofit organizations seek to serve a public good by fulfilling a particular mission. They aim to improve some part of the social or economic experience of their community members.
For-profits, on the other hand, exist to provide a product or service and make money for shareholders while they do it.
Where they get money to fund operations is another big difference between nonprofits and for-profit organizations. For-profits typically have investors or startup loans to get their operations off the ground; in either case, that money is paid back, either through regular loan payments or through percentage of profits moving forward. Nonprofit organizations, however, receive donations and grants with no expectation of returning them in any form; they must, though, show that the funds were used in service of the greater good.
Leadership & Structure
In for-profit companies, top leadership usually consists of individuals with a financial stake in the organization. The money they make depends on how well, financially, the company does—and so they have a vested interest in its success.
In nonprofits, however, leadership comes from a volunteer board of directors. These individuals are interested in the mission and vision of the nonprofit organization, and they receive no compensation for their service.
As discussed, the terms “nonprofit” and “for-profit” are connected to an entity’s tax status as designated by the IRS. Nonprofits do not pay taxes on their earnings because the services they provide are considered a public good. For-profits are required to pay taxes on the money they receive. Both entities have distinct paperwork and filings to complete on a regular basis.
It’s Your Choice!
Whether a nonprofit or for-profit model makes the most sense for an organization depends largely on the services it offers and the mission it’s looking to fulfill.
Entrepreneurs can go down either path—just make sure you’re well-acquainted with federal, state, and local requirements for whatever you choose!