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Nonprofit vs For Profit: 5 Key Differences

best practices board finances foundation funding Jul 20, 2023

Nonprofit vs. For Profit: 5 Key Differences

     Nonprofits and for profits have two distinctly different existences. They have different objectives and different structures. Today we’ll explore the five primary differences.

1. Tax Status

     The first main difference between a nonprofit and a for profit is their tax status. Nonprofits are tax exempt, which means they do not pay federal or state taxes, certain sales taxes, and even property taxes. (This is a generalization and can vary by state.) On the other hand, for profit companies  generate a profit and they're going to be taxed on all of those things at specified and designated rates.

2. Objective & Purpose

 The second difference between nonprofits and for profits is the objective or the purpose of the entities.  The primary goal of a for profit entity is to make a profit, and that profit is for their owner or their shareholders. But nonprofits exist not for dollars made, but for difference made. So a nonprofit’s purpose may be a social cause. They may serve the community by providing services to the public or performing other charitable activities. Therefore, a nonprofit’s Executive Director should ensure that the organization’s activities align with their mission as stated in their initial application. While a for profit company can do whatever it wants, a nonprofit’s activities must pass through the funnel of their stated mission and purpose. 

3. Ownership

     The third difference between nonprofits and for profits is ownership.  For profit entities have owners, sometimes that owner is an individual, or sometimes it can be investors, like shareholders. Whether they are one or many, it’s the owners that really control and influence the organization's activity. 

     On the other hand, a nonprofit is not owned by anyone. It exists to serve the public good. In this case, the board of directors is responsible for controlling the organization. 

4. Distribution of Profit

The next main difference between nonprofits and for profits is the distribution of profit. As I’ve written about previously here and here, it's not wrong for a nonprofit to make a profit. It's what they do with the profit that is restricted. One significant difference is that a for profit company can distribute the dividends to their owners or shareholders as a profit. Whereas a nonprofit simply cannot do that. That's what makes them a not for profit. Instead, they need to utilize that income and surplus to invest straight back into their exempt purpose. 

5. Access to Capital

 The last difference in today’s comparison of nonprofits and for profit entities is access to capital funds. Nonprofits really rely on the generosity of individuals.  Sometimes they may receive funding from foundations or even government grants, but they have no way of generating capital through investment or the sale of goods, etc. Nonprofits just don't have access to that kind of capital. So it's very different than a for profit, which has easier access to capital through borrowing, issuing bonds, or even selling portions of their company to shareholders or investors. 

     Those are some of the primary differences between nonprofits and for profits. I hope that will help to clarify some things for you if you find yourself transitioning into nonprofit leadership or sitting on the board of a nonprofit and asking yourself, “What’s the difference?”  If this has been helpful to you, then please consider subscribing here to these weekly tips, and you'll get one delivered to your inbox every week. I’ve created a huge library of blog posts and Youtube videos specifically for nonprofit leaders, so feel free to search the library for a topic that's of interest to you. For more personalized answers to your specific questions, you can also book a strategic consult with me here. 

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