Nonprofit vs For-Profit Organizations: What Is the Difference?

A nonprofit organization is a legal entity that operates for public or social benefit; their purpose is not to distribute the profit, but to use any surplus to achieve their goal of serving the community. Nonprofits may include charities, hospitals, schools, churches, etc.

A for-profit organization is a legal entity whose primary goal is to earn a profit. These businesses aim to distribute profit among its owners or shareholders.

Apart from the way both entities treat surplus, there are many other areas where both types of organizations differentiate from each other that are important for anyone to know when looking to start their own business venture.

Ownership

One of the key differences between nonprofit and for-profit entities is ownership. For nonprofit organizations, there are no owners. Nonprofits are governed by Board of Directors for accountability, instead. For-profit organizations are managed by owners and shareholders, and the number of shareholders can vary as per the size and scale of the organization.

Funding

Nonprofit organizations rely primarily on donations, grants, fundraising, and sponsorships. They can choose to go for multiple funding sources for sustainability, that way they can create a bigger impact. However, nonprofits may have restrictions on how they can use funding as per donors’ specifications. They must track non-restricted funds vs restricted funds. Restricted funds means that the donor has designated a specific purpose to how and/or when an organization uses the funds. Unrestricted funds means that the funds can be used at the organization’s discretion to support its mission.

In for-profit organizations, an owner contributes money or property to start and/or support the organization; this money is often raised by the owner through investments or lending.

Revenue Sources

A nonprofit organization’s revenue sources include donations, fundraising activities, grants, and sponsorship through events. These sources may differ from organization to organization. As mentioned earlier, the organization must track restricted and non-restricted funds. As nonprofits use donors’ funds, they’re often mandated to be transparent regarding usage of funds with their donors.

A for-profit organization’s primary revenue sources include sale of their product or services and have much flexibility regarding usage of revenue.

Expense Reporting

While each organization has different expenses based on their mission, level of activity, and size of the organization, nonprofits must track their expenses by function and by nature. This means nonprofits must allocate their expenses not only as per their types, like salaries or rent, but also as per the program they are offering and managerial or administrative expenses. For-profit organizations can track their expenses only by nature.

Financial Statements

Financial statements for nonprofits have different titles, as well, to better reflect their mission-driven focus. Since the main purpose of a nonprofit organization is not to earn the profit, but rather to fulfill its mission, nonprofit organization use a Statement of Financial Position instead of a Balance Sheet. They also use a Statement of Activities instead of a Profit and Loss Statement.

Taxes

One major advantage for nonprofit organizations is tax-exempt status. Nonprofit organizations are generally exempt from income taxes, if they are registered as 501(c)3 entity. There are exceptions to this, though, like if the organization has income sources from sources outside of their mission. For-profit organizations are not an exempt entity. They need to pay income taxes on their earnings.

Summary

Nonprofit and for-profit entities share many similarities, including the need for financial management, governance, compliance, and strategic planning to ensure long-term sustainability. While their mission and tax treatments are different, the underlying financial and business principals guide overall operations for both organizations.

For a more in-depth breakdown of the differences between the two types of organizations specifically within the healthcare industry, read “Differences Between For-Profit and Not-for-Profit Healthcare Entities.”

For specific questions, assistance, or additional information, please do not hesitate to contact a member of our EAS team. You can also learn more about nonprofits on our Nonprofit team’s industry page.

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