Should I declare my company as nonprofit or for-profit?
Whether you should declare your company as a nonprofit organization or a for-profit company depends on the reason you founded your company. Why did you start your company: did you aim to serve a philanthropic cause or did you wish to obtain revenue for yourself and your employees? Nonprofit organizations will channel all income so as to maximize funding for programs and services that aid the disadvantaged or underprivileged. For-profit companies will distribute profits (amongst employees, owners, shareholders, and the business) that were made from selling services and/or products that are desired by the market.
Just so you can get a sense of what type of companies qualify as nonprofits and which qualify as for-profits, here are some examples. Several of the top nonprofits in the United States include organizations such as: the American Cancer Society, the World Wildlife Fund, the Cleveland Clinic Foundation, Amnesty International, and National Public Radio (NPR). Examples of for-profit companies, on the other hand, include hospitals such as the Trinity Medical Center and the Tulane Medical Center and income-based colleges such as National College, Kaplan College, Kaplan University, and Capella University.
What is the difference between a nonprofit and a for-profit?
One of the most significant differences between a nonprofit and a for-profit organization is where it can source capital from. Nonprofits can only seek donations, where stakeholders receive “social return” on their investment. For-profits can obtain capital from private investors that expect a return on investment by receiving equity or dividends. There are also important tax and liability differences. Nonprofits can be income-tax exempt through IRS tax code section 501(c)3 and owners are not liable for debt. Any funds or profit made must be directed towards the mission of the entity. Upon liquidation, remaining assets must be given to another nonprofit. The taxation and liability of for-profits depends on the form of the organization, such as a sole proprietorship, partnership or corporation. If the for-profit goes out of business, the assets can be liquidated and distributed amongst owners and shareholders.
How do nonprofits and for-profits make their money?
For-profits rely on sales revenue in order to keep their company going, while nonprofits depend on donations or grants from the government, organizations, or individuals. Most of the funding for nonprofit organizations is donated income; therefore, nonprofit companies must use their limited funds creatively so as to make the most of the money and aid more beneficiaries. For-profit companies can spend income more freely because they acquire their own profits.
What types of employees comprise the workforces of nonprofits and for-profits?
Whereas nonprofit organizations consist of a smaller workforce and an abundance of volunteers, for-profit companies consist of a mix of salaried and hourly employees, as well as a few unpaid interns, if applicable. Because salaried positions and volunteers are entirely different designations, the procedures involved in hiring, direction, communication, and firing also differ completely.
Is there a way to link for-profit and nonprofit business models?
The for-profit and nonprofit business models are not mutually exclusive. Hybrid models seek to blend the benefits of each model to create a stable, sustainable organization. Nonprofits can start for-profit subsidiaries to take on debt and increase possible sources of capital rather than relying on donations and grant cycles. Hybrid entities are taxed independently of one another (either tax exemption or taxation based on corporate structure). Importantly, leadership boards must be kept separate between the nonprofit and related for-profit to avoid a conflict of interest. Special favors cannot be arranged between the entities and any transactions must occur at market value. An advantage of this hybrid structure is that nonprofits can stabilize income while for-profits can contribute revenue to charitable causes. An example of this hybrid structure is Goodwill Industries, which itself is a nonprofit that accepts donations. The donations are sold to for-profit subsidiary retail stores, where the profit can be used to further the organization’s mission.
By: Sue Han and Alexa Fornes, current college interns
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