When joining a new organization, understanding its structure, needs and goals can be tremendously beneficial for short- and long-term success. Two of the major organizational structures, nonprofits and for-profits, have different missions, target audiences, and problem-solving strategies. Students with a Master of Public Administration degree may find opportunities for roles within either organizational structure, so it’s important to recognize the key differences between the two.
1. Purpose
All companies have a distinct purpose, but this is where the difference between a nonprofit and a for-profit is the starkest. While for-profit organizations may have a variety of goals, their primary mission is to generate profit and develop effective products and services that are valuable to consumers. Companies develop products and services that either directly solve a problem or increase overall efficiencies, such as the case with mobile phones or autonomous vehicles. A nonprofit, by contrast, doesn’t prioritize profits and is instead dedicated to promoting a social cause or advocating for a particular standpoint. Examples of nonprofit services often include assisting with basic human and environmental needs such as food, water, education, endangered species, forests and wildlife. These services strive to solve important, potentially life-threatening problems and issues. Therefore, success for nonprofits is measured based on an organization accomplishing its philanthropic mission.
2. Funding
One of the most important aspects of running an organization is establishing a consistent method for funding projects and operations. For-profit organizations tend to fund their initial efforts through bank loans, local investors and revenue generated from sales. If a company’s product or service is considered to have a high potential market value, then they may have the opportunity to receive funding from national or global investors, such as angle investors and venture capitalists. Nonprofits often take a different approach by seeking out private donations of time and money, corporate sponsorships, and government grants, among others. Crowdfunding, a form of online fundraising, has also become a popular method of funding for nonprofit organizations as of late.
3. Diversity of Audience
For-profit companies can have a much more defined target audience than that of a nonprofit. In a for-profit, the company seeks to reach and establish a relationship with consumers who will purchase their products/services to help generate revenue. This relationship creates a continual feedback loop, allowing the company to increase its revenue and expand its offerings to reach new target audiences. Rather than delivering a product or service directly, nonprofits are typically approaching their audiences with a message about a product, service or action. Nonprofits must reach a more diverse audience which can include volunteers, donors, corporate sponsors, and the general public. Due to this broad audience, nonprofits must carefully consider the interests of each segment of their audience.
4. Leadership
The executive leadership of a for-profit company is typically quite clear. Whether it’s a privately held small-business or a large corporation with boards and stakeholders, leadership responsibilities are distributed amongst a select group of individuals. These individuals are considered not only leaders, but also have a stake in the financial success of the organization, which often results in incentives such as bonuses and profit sharing. Due to this, for-profit leaders are primarily concerned with profit and increasing revenue for the organization. By contrast, nonprofit organizations tend to be led and directed by a board of directors who guide the future of the organization without possessing direct financial ownership. The board can be anywhere from 25-30 members to upwards of 100 members. While not concerned as much with financial success, the leadership does have to balance financial concerns alongside social and/or environmental issues. In this case, leadership meeting agendas tend to include a wide array of topics such as funding for upcoming projects, social climate, environmental concerns, organizational performance, fundraising, social and political policies, and potential community concerns that need assistance or funding.
5. Organizational Culture
The differences in a mission can lead for-profit and nonprofit organizations to establish two distinctly different organizational cultures. Due to the goal of financial gain, the culture within for-profit organizations tends to focus on finances and business metrics, such as key performance indicators (KPIs). Employees are also encouraged to be innovative with the creation of new products and markets, all of which can help increase short- and long-term revenue for the company. The culture within a nonprofit is often more community-oriented, as employees are often asked to address and solve problems that have little financial incentive (ex. advocating
against deforestation). With this community-oriented culture, it’s common to see employees of non-profit organizations advocating for the organization outside their work schedule. This could be attending an evening fundraising event or handing out educational resources to local businesses on the weekend.
6. Taxation
Typically, nonprofits are registered as a 501(c)3 organization, which means that they are able to provide their services as a public good without rendering a portion of their earnings back to the government. Likewise, individuals and companies donating to these organizations are able to write off their contributions as tax-deductible. For-profit companies are not able to benefit from tax exemptions and must pay taxes as the law requires.
7. Staff
The workforce of a nonprofit can be wholly different than that of a for-profit corporation. While a for-profit corporation will consist mostly of paid employees and interns, a nonprofit typically relies heavily on volunteer staff. This element links up with many other aspects of a nonprofit company, as these volunteers will also frequently be on the front line representing the nonprofit organization’s mission to potential future donors.
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Sources
Non Profit Organization Vs. Profit Organization, Chron
Two Basic Types of Organizations: For-Profit (Business) and Nonprofit, Free Management Library
The Best Part of Running A Business Over a Non-Profit is The Constant Direct Feedback, Business Insider
The main difference between nonprofit vs for profit accounting is that for-profit businesses operate under the principles of profit and loss, while nonprofits operate under the principles of social welfare.
What are the differences between nonprofit vs for-profit accounting?
A for-profit company makes a profit for its owners. A nonprofit has two bottom lines. The first goal fulfills its stated mission. The second one provides the necessary funding to support your mission in the present time and the future.
Nonprofit organizations are considered public benefit corporations that receive their revenue from a combination of:
- Donations or grant income
- Donated facilities and equipment
- Low paid or volunteer staffs
Measurement of success between nonprofit and for-profit
- Financial Goals
- Accountability
- Accounting Software
The infographic below illustrates the measurement of success between nonprofit and for-profit accounting. Nonprofit accounting methods differ in terms of accountability and compliance.
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Nonprofit vs for-profit differences in accounting for income and expenses
The types of income and expenses you have will depend on your business. For example, if you are a consultant, you may have income from consulting, speaking engagements, and other consulting-related services. If you are a manufacturer, you may have income from selling products and services, manufacturing, and other manufacturing-related expenses.
- For-profit businesses must report their income and expenses in monetary terms, while nonprofit organizations are not limited by this measure.
- For-profit businesses must file annual financial statements with the IRS, while nonprofits do not have to make these filings unless they choose to do so.
- For-profits must pay taxes on their profits, which can be significant if their income exceeds a certain threshold; however, most nonprofits are exempt from paying taxes on their net earnings (after expenses are paid).
One important difference between for-profits and nonprofits is that for-profit businesses must maintain books and records to demonstrate their compliance with tax laws, while nonprofits are not required to do so. A for-profit company’s chart of accounts typically tracks revenue and expenses related to the sale of products and services in a general ledger.
What are the requirements for nonprofit accounting?
Nonprofit accounting is a field that focuses on the financial aspects of nonprofits. Nonprofits are an important part of the American economy and play a critical role in the lives of millions of Americans. Nonprofit accounting provides an important service to those who are in need.
Fund accounting focuses on accountability and stewardship rather than profitability. These general ledgers also go by the term funds . Funds allow organizations to separate resources into various accounts to identify where those resources came from and how they are used. Since nonprofit organizations receive benefits from being tax-exempt, they must keep detailed records while bookkeeping.
A nonprofit’s accounting system is typically a series of general ledgers, or funds, which enables the organization to track revenue and expenses to a single point of origin. Theoretically, each fund has a separate budget, and this separation in the books ensures the nonprofit is using grants and donations solely for permitted purposes.
Fund accounting can get complicated, depending on your organization’s needs. FASB117 and FIN46 are the IRS resources that outline a nonprofit accounting system’s needs.
Nonprofit vs For Profit Accounting Regulations
Nonprofits and For-Profit Corporations are two different types of corporations, and they have different legal rights and responsibilities. Nonprofits are not subject to the same financial regulations as for-profit corporations, and they are not required to pay corporate taxes.
For-profit corporations keep a balance sheet that reflects the assets the corporation owns, which can be distributed as retained earnings to shareholders. A nonprofit keeps a statement of financial position, which reflects the assets on hand that can be used to further the mission of the organization. A for-profit uses its accounting system to track net income, whereas a nonprofit tracks the excess of revenues over expenditures.
Understanding these major accounting differences between for-profits and nonprofits can help you avoid surprises and can ensure that your organization meets its financial accountability and transparency requirements under state and federal law.
Nonprofit vs For-Profit Taxes
While all for-profit businesses must pay taxes on their net income, nonprofits are not required to pay income taxes. Nonprofits are only assessed for taxes such as real estate or sales taxes and are required to file IRS Form 990. Filing the Nonprofit Form 990 ensures that charitable organizations are accountable to funding sources.
What is the tax-exempt status of the organization?
The tax-exempt status of an organization is determined by the Internal Revenue Service (IRS). The IRS is responsible for determining the tax-exempt status of the organization. As a 501(c)(3), the organization is not allowed to engage in political activities.
Criteria for tax-exempt status:
- The organization is tax-exempt.
- The organization is a 501(c)(3) nonprofit organization.
- The organization has not had its tax-exempt status challenged or revoked in the last five years.
Viewing a nonprofit’s 990 answers important questions such as revenue sources, sustainability, and how well the organization pays its employees. Potential board members can see who else is on the board and what the cash reserves look like.
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A donor’s contribution to a nonprofit organization will qualify as a charitable deduction on the donor’s income tax return. However, there are nonprofits that qualify as tax-exempt but their donors’ contributions do not qualify as charitable deductions (although they may qualify as business expenses).
Free eBook Download: How to Generate Compliant Nonprofit Reports
What are the reporting requirements for nonprofit and for-profit organizations?
Nonprofit organizations are required to file Form 990, which includes information about the organization’s annual and quarterly tax returns, financial statements, and the organization’s plans for the future.
For-profit businesses prepare balance sheets listing it’s owner’s equity. This is broken down by assets, everything the company owns, and liabilities, everything the company owes. A nonprofit generates nonprofit financial statements. They do not use a balance sheet because there are no “owners”. Instead of a balance sheet, a nonprofit generates a statement of financial position, which details assets and liabilities. An accountant can determine the size of the nonprofit by reviewing its net assets.
A for-profit business will prepare an income statement each quarter. This lists its revenue, gains, expenses and losses. This information is used to assess how profitable the company is on a quarterly basis. Since nonprofits are not concerned with profits, they prepare a statement of activities on a quarterly basis. This report lists its revenue minus expenses plus net assets.
What are the differences in financial reports?
For-Profit businesses generate the following financial reports:
- Balance sheet
- Income statement
- Cash flow
- Statement of stockholders’ equity
- Statement of changes in stockholders’ equity
Nonprofit organizations generate the following financial statements:
- Statement of financial position (SOP) – Balance sheet
- Statement of activities – Income statement
- Statement of functional expenses
- Statement of cash flow
A for-profit corporation keeps a balance sheet that reflects the assets the corporation owns, which can be distributed as retained earnings to shareholders. A nonprofit keeps a statement of financial position, which reflects the assets on hand that can be used to further the mission of the organization. Likewise, a for-profit uses its accounting system to track net income, whereas a nonprofit tracks the excess of revenues over expenditures.
Understanding these major accounting differences between for-profits and nonprofits can help you avoid surprises and can ensure that your organization meets its financial accountability and transparency requirements under state and federal law.
Nonprofit Accounting Course: Learn essential skills to strengthen accountability and avoid costly mistakes. Get in-depth training on fund accounting, budgets, financials and more.
For Profit vs Nonprofit Accounting Software
Off-the-shelf accounting software is a one-size-fits-all solution designed for for-profit use. Since it is not designed for nonprofit accountability, it is extremely limited and restricted for a nonprofit.
You will need to become a magician to make this work for your nonprofit. You know what I’m talking about. How many tricks up your sleeve do you need to get your accounting system to do what you need. And after all that, you still have to take an extra step to dump all your data into a spreadsheet to generate financial reports.
You can either do this the hard way, or you can choose the easy route by getting the right tools for the job.
Schedule a FastFund Online Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.
When evaluating a software solution, make sure it provides the tools for the unique requirements of nonprofit organizations. This is how you can become more accountable, cultivate better relationships with your donors, raise more funds and help your nonprofit fulfill its mission.
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