Whether you’re entering the human rights/activism field as a full-time career or you’re incorporating activism into your existing job, you’ll encounter both nonprofit and for-profit organizations. In this article, we’ll discuss the differences between nonprofits and for-profits, as well as what organizations should know before choosing a status.
What are the differences between nonprofits and for-profits?
A nonprofit’s goal is to benefit the community, so instead of distributing profits to company stakeholders, profits return to the nonprofit. For-profits, on the other hand, aim to collect profit for their stakeholders, which includes their employees and leaders. Rather than putting profit back into the organization to further its mission, profits are distributed to stakeholders after any expenses and debts are paid. Beyond this central difference, nonprofits and for-profits diverge in a few ways. Indeed.com lists several, including:
Donations and grants fund most nonprofits. For-profits depend on investors (and sales) to keep thriving. In exchange, investors usually get a share of the profits, which is not the case with nonprofits.
Because they depend on donations, nonprofits try to draw in as many people as possible. Their “target audience” is broad and includes possible donors, volunteers, the community the nonprofit wants to help, organizations that could partner with the nonprofit, and anyone who benefits from the services or products the nonprofit offers. For-profits tend to spend a lot of time researching their ideal audience and designing their marketing strategy around them. They don’t want to waste resources targeting an audience that doesn’t need or want their product or service.
How their taxes are set up is one of the major differences between nonprofits and for-profits. To operate, nonprofits in the United States must get a special tax designation. This is usually done by registering as a 501(c)3, which gives an organization tax benefits that for-profits can’t access. There are certain rules a 501(c)3 must adhere to. None of its earnings can go to any private shareholder or individual, it can’t try to influence legislation as a “sustainable part” of its activities, and it can’t engage in campaign activities for or against political candidates.
Which is the best status for an organization?
It’s not always obvious whether nonprofit or for-profit status is the right choice for an organization. Understanding the differences is the first step. It’s also important to understand the pros and cons of each structure. Here’s what to consider:
Starting a nonprofit can be expensive and complicated
The startup cost of a nonprofit can be high. There are filing costs for incorporation, tax exemptions, annual reporting requirements, and more. It’s also trickier to start a nonprofit because they depend so much on donations. In the beginning, it can be very challenging to raise enough funds to start running. This entire process can be complicated and may require special accountants and lawyers, who have their costs, too.
Nonprofits are scrutinized more than for-profits
Because of the tax rules surrounding nonprofits, their finances are more heavily regulated. They are also available for the public to see. By choosing nonprofit status, an organization must fully understand its responsibilities and that they’re accountable in a way for-profit orgs are not. If a nonprofit is not up to the task, it can lose its 503(c)3 status.
Nonprofits access special benefits
When organizations register as a nonprofit, they get exemption from federal and/or state corporate income taxes. They may also get an exemption from state sales and property taxes. Nonprofits are also allowed to apply for grants and other funds that for-profits can’t access.
Nonprofits enjoy limited liability
Nonprofits are not the same as limited liability companies (LLCs), but nonprofits can become incorporated (most do) and enjoy limited liability protection. This means that directors, employees, and members will not be held liable for the organization’s debts, lawsuits, and fines. One or more 503(c)3 organizations can form an LLC as an ancillary entity, but it isn’t common because of how complex the process is.
Alternatives to the nonprofit/for-profit binary
When it comes to which status is right, it isn’t as simple as nonprofit = social good and for-profit = making money. Like nonprofits, for-profits can engage in activism and promote the public good. Common structures include C corporations, LLCs, and sole proprietorships. For-profit founders and boards that prioritize social good can also have a meaningful impact even though that mission isn’t part of the legal structure. For-profits can also sign on to private certificates, like the B Corporation (also known as B Corp), which is given out by B-Lab, a global nonprofit.
Hybrid structures blend a for-profit entity with a nonprofit. The for-profit may create the nonprofit or vice versa. At least in the United States, a for-profit can’t own a nonprofit, but a for-profit can structure it so it has control over the nonprofit. Nonprofits can legally own for-profits. You see this often with corporations that have charitable foundations. A hybrid structure can be a good choice because a subsidiary can protect the nonprofit’s status and be easily sold. The parent nonprofit can also be protected from the for-profit’s liabilities. Hybrid structures are often more complicated, however, and it can be risky for the nonprofit to depend on funding from the for-profit part. Whether a nonprofit, for-profit, or hybrid structure is right for your organization depends on factors beyond the organization’s goals. Consider all your options and the pros and cons before making a decision.