When it comes to businesses and organizations, “nonprofit” is a word that gets thrown around a lot. Though people generally use it to describe some sort of charitable institution, few are truly aware of what this phrase means. There are some distinct differences between profit and nonprofit businesses that go far beyond their basic profit goals. These two types of organizations are different in the following ways.
Use of Profits
Of course, the simplest difference between a profit and nonprofit is that a for-profit business uses profits to enrich the owners, shareholders, and employees. In contrast, a nonprofit theoretically use the profits they obtain to further a charitable cause. The number of profits they report may vary depending on business expenses, but any profit should go towards some sort of charitable organization.
A for-profit business is only accountable to any shareholders it might have, and all it is responsible for is generating the most profit possible in its situation. Nonprofits tend to have a lot more accountability requirements. Unlike a for-profit business, they are accountable to any source of funding, such as donors or grants. The non-profit has to carefully track what they do with profits to show people that they are only using profits to run the business or provide charity.
Nonprofit businesses are willing to submit themselves to the extra regulations that come with a nonprofit designation because of the tax benefits they get. Instead of having to pay taxes on net income, a nonprofit just has to fill out an IRS form 990 for real estate or sales taxes. The majority of the profit they make is not taxable.
Control of Decisions
Who controls for-profit business changes depending on the business type, but it can be a single person or a board of shareholders. Nonprofits do not have this since they are technically owned by the public. Instead, they are run by trustees or a governing board. These board members can be fired and removed when needed, and their main goal is making sure the company achieves its purpose. Even if the nonprofit was founded by a single individual, that person does not have complete control.