For-Profit vs. Nonprofit Explained
If you are looking to start a business, you will eventually have to decide: for-profit or nonprofit? Are you trying to create an entrepreneurial empire or solve a societal problem? Perhaps you want to do both.
While there are no wrong answers, understanding your end goal will ultimately determine how you structure the organization and generate revenue.
Let’s take a look.
Defining For-Profit and Nonprofit Entities
For-profits aim to maximize profitability through products and services, whereas nonprofits are values-driven entities intended to improve quality of life. Nonprofits are guided by a shared mission and vision that give the organization direction and purpose.
For instance, did you know that nonprofits cannot be privately owned? Nonprofits have no shareholders and do not offer stock options.
Because nonprofits rely heavily on public trust and generosity, offering stock options would have ethical implications. As an organization grows, shareholders would profit from donations, which is contrary to the mission of a publicly-funded organization that aims to improve society, not line the pockets of its investors.
That said, if you establish a successful nonprofit, eventually, it will take on a life of its own.
So who is responsible for providing oversight? The board of directors provides oversight for nonprofits. As opposed to for-profits, which are only required to appoint a board if a business is publicly traded, nonprofits must establish a board before registering as a nonprofit.
Since nonprofits cannot be privately owned, instating a board ensures accountability. In the nonprofit world, the board is legally obliged to provide fiduciary oversight to ensure its resources are being used lawfully and ethically.
Additionally, a nonprofit 501(c) organization must adhere to strict guidelines in order to qualify and maintain its federal income tax-exempt status.
Do nonprofits pay any taxes? If an organization qualifies for tax exemption, it is important to note that it does not mean the nonprofit is exempt from paying all taxes. It means it is exempt from paying federal corporate income tax on revenue derived from activities directly related to its mission.
In other words, if a nonprofit hosts an event or sells a service or item that generates revenue, it must be related to the organization’s mission in order to qualify for tax exemption. Funding Nonprofits mainly acquire funding through public and private donations, grants, and related products and services. Moreover, any revenue generated has to be reinvested back into the organization to support its cause.
If an organization deviates from their mission or fails to allocate money appropriately, they run the risk of losing their tax-exempt status.
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