The meaning of nonprofit can be confusing. Some business owners want to run a business without the pressure of earning a profit. In other words, the business makes just enough money to pay all of its expenses and support it. But this does not mean the business can become a nonprofit entity.
Becoming a nonprofit involves more than not making a profit. The key element that makes a nonprofit different from a for-profit is that it serves a humanitarian need or benefits society. It has no owners like a privately held company or shares like a publicly traded corporation.
What Are the Key Differences Between Nonprofits and For-Profits?
Nonprofits depend on donations and grants for funding. They use these donations to support programs and services to meet the needs of people, such as education, food and medical treatment. The money could go toward environmental causes like saving endangered species or fighting deforestation.
Unlike for-profits, nonprofits are exempt from federal taxes and most state taxes. Donors who contribute to the nonprofit can get tax incentives for their donations. Small businesses identified as sole proprietorships or partnerships can be held liable for the company's debt. The IRS classifies nonprofits as legal entities for tax purposes. However, the organization's founders will not be held liable for debts.
The IRS publication "Tax-Exempt Status for Your Organization" identifies almost 30 types of nonprofits. One of those is a credit union. Most banks tend to be for-profit entities, but credit unions are not. Their fees and loan rates are usually lower than those of banks. They are also owned and controlled by people or members who use their services.
What Are Hybrid Organizations?
Some companies or organizations have both nonprofit and for-profit activities. For example, for-profit companies may support a cause by donating a percentage of their profits to a cause or charitable activities.
On the flip side is Goodwill, a purely nonprofit organization. It receives donated goods such as clothes, sporting goods, toys and household products. Then, it turns around and sells these items in its stores and online. The profits fund more than 85 percent of Goodwill's programs and services.
Some organizations prefer to go with a hybrid approach as a means to raise funds to sustain itself. Instead of soliciting donations and applying for grants, they generate revenue from a product or service. The revenue provides the needed funding to support a nonprofit's programs, services or activities. This allows the organization to benefit from the advantages of both models.
Some founders eschew this approach because it is hard to get funding from philanthropists and venture capitalists. Furthermore, hybrids essentially involve starting up and managing two separate entities. This can create more overhead. It can be challenging to ensure the two entities remain separate. If the for-profit side does not generate enough revenue, it forces the nonprofit entity to diversify its funding.
Working in a Nonprofit Versus For-Profit Setting
While there are differences in working for nonprofits and for-profits, the differences do not apply to all organizations. For instance, nonprofits are more likely to have unpredictable hours. Still, plenty of nonprofits have standard work hours.
Since nonprofits rely on volunteers, they may have evening and weekend hours to allow volunteers to serve outside of work hours. When it comes to salaries, some nonprofits may pay competitive salaries while others pay less but add more benefits than what is standard in a comparable for-profit.
Every dollar counts in nonprofits. The goal is to funnel maximum funds into their cause. For this reason, nonprofits may opt for used furniture and low-rent neighborhoods. However, not all nonprofits are strapped for funds. Some have better financing, especially institutional ones like hospitals and universities.
When nonprofits have limited resources and staff, they may require employees to do multiple jobs. Having to wear many hats enables employees to gain new skills and become more versatile. For-profit operations usually have the resources for a complete staff and rarely require employees to perform multiple functions in a single role.
Generating enough funding can cause staff burnout in nonprofits. This is not to say that for-profit employees have it easy. They too can burn out from the pressure to hit revenue targets.
Privately held, for-profit entities have fewer target audiences. Typically, their audience consists of users of their product or service. In contrast, publicly owned companies answer to their board and the shareholders. Similar to publicly owned entities, nonprofits' stakeholders include donors and users of their products or services.
When it comes to a dress code, some companies — be they for-profit or nonprofit — require business attire while others are more casual. Some nonprofit jobs require long or weekend hours and some do not. Attending a job interview at a nonprofit can give you an idea of the dress code and also clue you in to their culture and way of working.
Nonprofit employees usually share a passion for the organization's mission. This focus creates a different environment than one where profit is the driver. Having the opportunity to make a difference is a huge motivator for nonprofit employees, and the chance to give back every day is an important source of job satisfaction.
Learn more about the LSU Shreveport online Master of Science in Nonprofit Administration program.
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