What is the difference between profit making and not for profit making organizations?

For-profit and not-for-profit organizations share many qualities but also have some distinct differences. At face value, the term "for-profit" suggests a company seeking to make money (and usually as much as possible), while the term "not-for-profit" suggests a company that doesn't make money. Actually, not-for-profit organizations seek to generate revenues to serve a specific organization mission, transferring a lot of the profit to defined community efforts.

Examples of not-for-profits might be charities, clubs or community organizations. For-profit organizations are everyday businesses.

Business Entity Creation

Whether a for-profit or a not-for-profit, the early stages of the entity are the same. The early stages begin with filing for a business entity in the state in which the organization opens its operations. Business entity types include: corporations, limited liability companies, partnerships or sole proprietors.

Entities are initially filed with the secretary of state. There are different tax benefits with these entities that suit different business owners of for-profit companies. Most not-for-profits start as corporations.

Applying for an  Employer Identification Number

Once a business entity is formed, it then applies for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS). This is the official tax number any business entity needs to open bank accounts, to apply for loans and to file tax returns. Once the EIN is obtained, a not-for-profit must apply for "tax exempt status" with the IRS, using Form 1024 seeking exempt status under IRS Code 501(c).

Tax-Exempt Status

Once an organization is given tax-exempt status, it is considered a not-for-profit or charity type of business. Even though these are tax-exempt organizations, they still file annual tax returns like for-profit companies. Tax-exempt organizations must adhere to public disclosure requirements, and must make meeting minutes and financial documents of the previous three years publicly available upon request by any one in the public. The IRS Exempt Organization Status Check is a database that maintains the current exempt status for all tax-exempt organizations.

Methods of Generating Revenues

A significant distinction between a for-profit and a not-for-profit is how each type of organization generates revenues. For-profit companies generally sell a product or provide a service. A not-for-profit organization usually operates fundraising efforts with donations, events and corporate sponsors. Not-for-profits might still sell products. Girl Scout Cookies are a prime example of a product that's produced and sold by a not-for-profit that generates revenues to support the mission of the organization.

Organization Oversight and Management

As business entities, both for-profit and not-for-profit organizations maintain a separation of assets and liabilities between employees and executives. Both entities must vote for an annual board of directors that holds regular meetings to review the progress and direction of the company.

Not-for-profits usually have larger boards of directors that might be voluntary members bringing in resources to help expand the organization's community outreach and fundraising efforts. The volunteer labor force is distinct to the not-for-profit organization, whereas for-profits have paid employees and contractors that perform duties. Larger not-for-profits, including some local agencies, do have payrolled employees running the organization.

Posted on Jul 9, 2019 10:04 AM

The most significant difference between nonprofits and for-profit organizations lies in their purpose: nonprofits have a social mission, while for-profits aim to offer products and services that are valuable to consumers and generate revenue. Nonprofits also receive certain tax breaks. Check out these seven key differences between nonprofit and for-profit organizations in our latest infographic.

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