Nonprofit or For-profit: They both make profits, so what's the difference?

Many people believe that nonprofits can't make a profit, but that just isn't true. Nonprofits and For-profits alike are set up to make a profit, where the word "profit" means a financial gain. But one major difference between the two is how they can distribute that profit. For-profit businesses can distribute their profits to an owner, where as nonprofits can't because they have no owner - or do they? Ownership is another major difference between a nonprofit and for-profit business that directly influences the distribution of profits.

For-profit businesses have an owner, where as nonprofits do not have an owner. Although many people believe the founder of a nonprofit is the owner, that just is not the case. And, founders that treat nonprofits like their own personal business will find themselves under scrutiny for fraud and possibly in the ranks of other incarcerated, good intentioned people. So if the founder isn't the owner of a nonprofit, who is? My typical response is, "No one and everyone."

In the context of a small business, you often have one owner that is making final decision on how the business is run and how profits are allocated. And that owner can allocate the profits to their personal gain. In the context of even the smallest of nonprofits, according to the Society of Nonprofit Organizations, a board "runs" a nonprofit. The board chooses its members, its manager, and how profits are allocated. While there is an executive director or chief administrator, there is no single owner making final decisions on how the nonprofit is run and how its profits are allocated, as is the case with a small business. And while the board runs a nonprofit, they do not own the nonprofit, and can't allocate the profits to their personal gain. In addition, nonprofit corporations can not be sold like other a business can be sold. So if a nonprofit doesn't have a single owner are they accountable to anyone?  

While nonprofits don't have a single owner making decisions, and allocating profits, they, just like for-profit businesses, are accountable to the states they operate in and the IRS. But in addition, they are required to be fiscally transparent, opening up their accountability to many more constituents than your average business. Nonprofits are created to provide a charitable purpose to the public good, whether as charities, educational programs, churches or religious groups, scientific or artistic organizations. In the end, nonprofits are open to the accountability of the public they are established to benefit, whether that be the donors or the clients they serve.

While a small business may have one person at the helm, nonprofits have a multitude of voices that feed into their ultimately fulfilling on their mission vision and goals. In all practicality, nonprofits are owned by no one and everyone, while small businesses are often owned by one person, giving both their unique position in the overall business landscape. Recognizing the difference between the two and utilizing it can be the difference between mission success or mission failure for both the nonprofit and the for-profit business. Nonprofits and For-profits that utilize this difference can participate in a symbiotic relationship that .makes a positive impact on their perspective communities and reach far beyond to impact the world.  

Are you a nonprofit or small business struggling to fully grasp your unique position in the larger landscape of businesses? Do you need some help getting your financials in order, such that they clearly reflect your commitment to your mission, vision and goals? Please contact me! I'd love to hear your nonprofit or small business story, and see if I can help liberate your time and efforts to fulfill your mission, vision and strategic goals. 

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business adviser, or tax adviser with respect to matters referenced in this post. Candance Weaver Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.