6 Differences Between For-Profit and Nonprofit Organizations

Have you ever wondered what exactly is the difference between for-profit and nonprofit organizations? As suggested by their names, it is easy to understand that the main difference is connected with the profits of these organizations. However, it has nothing to do with whether they make profit or not, but rather with the following:

Purpose

All organizations have a purpose, but one of the biggest differences profit versus nonprofit organizations have lies in the fact that for-profit organizations’ primary mission is to generate profits for personal fulfillment. They do this by creating and selling products and/or services.

On the other hand, the main goal of a nonprofit organization is to make profits for serving society. They promote a social cause by offering assistance with basic human needs. Nonprofits aim to tackle challenges and solve important issues such as alleviating poverty, providing education, food and water, assisting with housing, protecting endangered species and/or the environment, etc.

Funding

Providing funds is the basis of all successful operations and projects. The seed capital of for-profit organizations is provided by the founders or business owners, by bank loans, investors and revenues generated from sales of their products and services.

Nonprofit organizations use a different approach. They seek both private and corporate donations of time, material, products, and money. Government grants are also used for funding the operations of nonprofits, together with crowdfunding.

Target Audience

When looking at for-profit vs. nonprofit organizations, the diversity of the audience is another key difference. While for-profit businesses have a more precisely defined target audience, that is usually not the case with nonprofits. While for-profit organizations try to establish a relationship with clients who buy their products and services in order to generate revenue, the nonprofit ones seek to reach a more diverse audience including volunteers, corporate sponsors, donors, and the general public. Therefore, nonprofits need to take into account the different interests of each segment of their audience.

Management

A for-profit organization can be a privately held business or a large corporation with boards and stakeholders. Responsibilities are distributed among individuals or a group that takes part in the financial success of the business. Since for-profits are primarily focused on increasing revenue, not only do these for-profit leaders share responsibilities, but they often share financial incentives.

Nonprofits, on the other hand, are mostly led by trustees, a board of directors or committee members that do not have direct financial ownership. Their main concern is not about financial success, but about social and/or environmental issues.

Organizational Culture

For-profit vs nonprofit organizations differentiate in their organizational cultures. Since for-profits tend to focus on the financial gain, they value employees who contribute to the creation of new products and services, as this can help increase revenue.

Nonprofit organizations, on the other hand, are community-oriented. Their employees are often seen supporting the cause outside their regular schedule attending events or handing out informative and educational resources to local businesses in the evenings or on weekends.

Taxation

Since for-profit companies make profits for their own benefits, they have to pay taxes as required by the law. However, nonprofit organizations are exempted from paying taxes as they make profits to help society. In addition, individuals and businesses that donate to nonprofits can claim tax deductions.

If an organization is a nonprofitable entity, that does not mean it cannot be profitable. Just like for-profit organizations, the nonprofit ones very often have the same approach to generating revenues and increasing profits with the aim of creating more programs or improving the existing one(s). However, the difference between a for-profit and nonprofit organization is that the latter is required to reinvest any profit in pursuit of its purpose.

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Nonprofit vs. For-Profit: Which is right for you?

In the United States there are three broad categories of business models: traditional for-profits, nonprofit corporations, and non-traditional hybrid models. Within the umbrellas of traditional for-profits and non-traditional hybrid models there are multiple options from which to choose – each offering its own costs and benefits. For more information about each of these business models, click here to view the chart which endeavors to lay out the basics of each model in more detail.

Nonprofit

Before we discuss the challenges and benefits of the nonprofit structure, we should define the core vocabulary involved. (The terms below are often conflated, so it’s useful to have clarity about the differences between them.)

Nonprofit corporation is the legal entity most nonprofits use to register with their state government. It is possible to establish a nonprofit organization using another business structure, but a corporation is generally the most appropriate organizational structure.
Tax Exemption is achieved when a nonprofit corporation has filed the necessary paperwork with their state government and the IRS to exempt the organization from paying income taxes. At least on the federal level, nonprofit organizations are not automatically tax exempt, and each state has its own tax code and regulations. To find out more about the rules in your state, consult a tax professional.
Tax Deductible refers to the kinds of gifts (the most common being cash donations) a nonprofit can receive after they successfully apply for tax exempt status. Tax deductible gifts can be written off by individuals and businesses on their tax returns. The ability to receive tax deductible gifts is a benefit granted to some (but not all) 501(c)(3) charities.
501(c)(3) is the section of the U.S. Internal Revenue Code (the “tax code”) that exempts charitable nonprofit organizations from paying federal corporate income taxes.
Private foundations and public charities are the two umbrella classifications of organizations laid out in section 501(c)(3) of the tax code. Anyone looking to start a journalism venture will likely want to be classified as a public charity, as private foundations face a number of additional complex legal rules and restrictions.

Organizations with the following purposes are able to apply for tax exemption under section 501(c)(3): religious, charitable, scientific, public safety testing, literary, educational, amateur sports, or the prevention of cruelty to children or animals.

You’ll notice that journalism is not listed there. The IRS has had a long and complicated relationship with journalism which has at times threatened the ability of news organizations to receive tax exempt status. Most journalism nonprofits receive their exemptions as organizations with an educational purpose, but the IRS has specific ideas what educational organizations do. You should review the work of the Digital Media Law Project’s IRS guide before filing for your application for 501(c)(3) status, and definitely consult a tax professional.

Here are some things to consider about setting up as a nonprofit:

Administrative Costs: Nonprofits require significant administrative coordination including required federal and state documents (such as Form 1023 –the application required of nonprofits seeking tax exemption from the IRS), organizational documents (bylaws, board meeting minutes), and ongoing administrative tasks (IRS Form 990, audits, etc.)
Foundations and Donations: Nonprofits are eligible to receive private foundation grants and tax deductible gifts from private individuals. Commercial entities can also receive grants and donations, but donations to for-profit entities are not tax deductible and many foundations often will only make grants to 501(c)(3)s.
Nonprofits can make profits: Within reason, nonprofits are legally allowed to make a profit. Nonprofits are permitted to accumulate a reasonable reserve, but they are not allowed to operate with the goal of accruing profit. Nonprofit organizations that seem to be intentionally overshooting their budgetary goals can have their tax exemption revoked by the IRS. Any profits are required to go back into projects that fulfill the organization’s mission. In addition, 501(c)(3) nonprofits may not be operated for the benefit of any private person or group.
Taxation: 501(c)(3) nonprofits do not pay federal corporate income taxes, and they often are not subject to state income taxes. Depending on your locality, 501(c)(3) nonprofits may be exempt from other forms of taxation. For more information on the specific tax rules in your state and town, consult a tax professional.
Advertising: Within certain constraints nonprofits are allowed to sell advertisements. Many nonprofit journalism sites – including MinnPost, VTDigger, and Mother Jones – include ads. However, it is important that ad revenue is accounted for correctly so you don’t end up paying too much in unrelated business income tax, which can raise red flags at the IRS and result in the revocation of an organization’s 501(c)(3) status. In granting nonprofit status the IRS examines whether newsrooms are operating differently than commercial outlets, so advertising is best used as a supplement to other revenue streams. For more on nonprofit journalism, advertising, and the IRS see the Digital Media Law Project.
Endorsements: Organizations with tax exemption under section 501(c)(3) are not allowed to endorse or oppose candidates for political office.
Lobbying: Nonprofits are allowed to engage in some lobbying and can engage in advocacy, but there are somewhat complex limitations on both. The resources at Bolder Advocacy offer good guides for nonprofits looking to engage in lobbying and advocacy.

For-Profit

While there are reporting obligations and other formalities associated with commercial newsrooms, compared to nonprofits, for-profit news organizations have relatively few rules to take into consideration or abide by.

Ownership: As is outlined in the accompanying chart, ownership and managing powers vary depending on the business model you choose. In a for-profit venture the owners are able to maintain close control of their business in virtually all models (the exceptions being a publicly-traded corporation or a benefit corporation).
Revenue Generation: For-profits have similar options to those of nonprofits except for being eligible for tax deductible donations. However, if a for-profit news venture wants to raise capital from their readership (in a move analogous to nonprofits soliciting individual donations) they can do as Berkeleyside has done and start a direct public offering (DPO) or other investment mechanism.
Professional Compensation: For-profits are permitted to distribute profits, and high salaries do not raise the same kind of suspicions in for-profit ventures as they do in nonprofits.
Taxation: Depending on the for-profit business model you choose (click here to see the attached chart for more information), for-profits may be required to pay corporate income taxes. This means that revenue is subject to double taxation –first on the business level and then again when it is distributed as salary to employees.
Advertising: For-profits are allowed to sell as many advertisements as they want with no restrictions on the content, and they can include as many calls to action as they want in their political coverage. In addition, they can endorse political candidates for elected office.

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To the uninitiated, the terms nonprofit and not-for-profit may seem identical—in fact, they’re often used interchangeably. Despite their similarity in name, however, nonprofit and not-for-profit businesses are distinct types of organizations, with different tax treatments, governance rules, and missions.

Non-profit vs. not-for-profit

Nonprofits and not-for-profit organizations are similar at their core: both eschew the pursuit of profit above all else. However, not-for-profit organizations differ in their scope.

If you’re looking to form a smaller, more local organization for a recreational purpose, a not-for-profit may be right for you. However, if your goals are more ambitious and centered on the advancement of a social cause and public benefit, a nonprofit may be a more suitable choice.

What is a nonprofit?

A nonprofit organization is a business that receives special tax-exempt status from the US Internal Revenue Service (IRS) if its mission and purpose is to advance a social cause and offer a public benefit. That benefit can vary depending on the type of nonprofit, but generally speaking, qualifying organizations will have a religious, charitable, scientific, public safety, educational, or animal welfare focus.

Nonprofit organizations do not pay income tax, property taxes, or sales tax. Examples of business entities in the nonprofit sector include charitable organizations, private foundations, most colleges and universities, houses of worship, and research institutions. Nonprofits are sometimes also referred to as non-stock corporations, or 501(c)(3) organizations (depending on the subsection of the tax code’s Section 501 that provides for their financial status).

Nonprofit organizations are similar to for-profit businesses in that they aim to maximize their revenues; however, nonprofits are prohibited from putting the profits they generate toward anything other than advancing the organization. That means there are no shareholders, and owners may only receive compensation in the form of salaries.

To ensure they are meeting these requirements, nonprofits must make their financial and operating information public so that potential donors can see where their gift might go.

What is a not-for-profit?

Not-for-profit is a broad term for organizations that do not generate profit for their owners. All money generated by a not-for-profit business must be reinvested back into running it.

Unlike nonprofits, not-for-profits are required to operate specifically for the benefit of the public or the advancement of a social cause. A not-for-profit can simply operate to serve the goals or special interests of its members. For example, a recreational sports club can operate as a not-for-profit.

Like nonprofits, not-for-profits must apply to qualify for tax-exempt status with the IRS. However, money donated to not-for-profit organizations is not tax deductible.

Nonprofits vs. not-for-profits: similarities and differences

Nonprofits and not-for-profits both enjoy tax-exempt status from the IRS. However, they have several key differences in scope and how each serves the broader community.

Purpose and mission

How they’re similar: Neither nonprofits nor not-for-profits operate with the goal of generating profits for ownership.
How they’re different: While not-for-profits can be formed and run solely to meet the goals of their members, nonprofits are driven by charitable purposes and must seek to advance a social cause and benefit the public good.

Liability

How they’re different: Like a traditional C corporation, a nonprofit organization can operate as a separate legal entity from a business owner. By contrast, not-for-profits are similar to general partnerships in that they enjoy no legal separation from the members involved. However, some states, like New York and Florida, allow not-for-profits to incorporate as their own legal entities while retaining some state tax exemptions.

Tax treatment

How they’re similar: Both nonprofits and not-for-profits are exempted from certain kinds of taxation by the IRS.
How they’re different: Donors to nonprofits can deduct their gifts on tax returns; individuals who give money to a not-for-profit are not entitled to tax deductions. Nonprofits themselves are also subject to stricter tax scrutiny than not-for-profit organizations. For instance, they are required to report revenues, while not-for-profits are not.

Revenues

How they’re different: Nonprofits run with the purpose of maximizing revenues for the causes they support. Not-for-profits do not run with the goal of earning revenue, and any money earned has to go back into the organization itself.

Employees

How they’re different: While nonprofits may have paid staff (often including a president or CEO), not-for-profits are run by volunteers.

Nonprofits and not-for-profits vs. for-profit organizations

Unlike for-profit ventures, nonprofits and not-for-profits are not concerned with generating profits for owners. That said, nonprofits are more similar to their for-profit counterparts than are not-for-profits.

Both nonprofits and for-profit organizations seek to maximize revenues. Whereas for-profits may distribute revenues above the profit line to shareholders, nonprofits must recycle those earnings back into the organization. Not-for-profit organizations simply seek to generate enough money to keep the lights on.

Switching organizational types

Some organizations and businesses may initially form as a nonprofit or not-for-profit, but later decide to convert to a for-profit venture, or vice versa. While the process can be difficult, it’s possible to convert from one type of business entity to another.

Converting from nonprofit or not-for-profit to for-profit

To convert from a tax-exempt organization like a nonprofit or not-for-profit to a for-profit venture, you will need to notify the IRS in writing with a “statement of nonprofit conversion.” The statement must include:

The reason for your conversion
A certified copy of a liquidation plan, which explains what will happen to the nonprofit’s assets upon conversion. Are you rolling assets into the for-profit venture? Make sure to incorporate them into your estimate of the organization’s fair market value.
A list of all asset recipients and the assets to be distributed.
An estimate of the fair market value of the organization.

Converting from for-profit to nonprofit

Converting a for-profit venture into a nonprofit is a bit more complicated than the other way around. The IRS makes this process more complex to discourage for-profit businesses from converting simply to avoid paying taxes. To execute the conversion, you will be required to:

Write a mission statement explaining how you plan to serve society as a nonprofit, including charitable purposes.
Write and adopt bylaws through a vote of an appointed board of directors. You may choose to adapt your existing corporate bylaws to reflect your new nonprofit mission, or completely rewrite them. You may also choose to roll existing board members into the new nonprofit, or appoint new ones.
File articles of incorporation with the state secretary of state office.
Follow certain state-specific rules for conversion. In New York, for example, you will need to create a separate nonprofit organization, then merge it with your for-profit venture into a single new nonprofit organization.

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