Should you start your business as a for profit or nonprofit? Learn which business model works best for you.
Corporate social responsibility is a proven strategy that engages both employees and customer base. By choosing brands and organizations that align with their values, consumers are voting with their wallets.
A 2020 global study showed that consumers are four to six times more likely to trust, buy and protect a purpose-driven company. This consumer behavior encourages companies to make a difference in highly competitive markets.
However, business owners are conflicted about how to make contributions and how it correlates to their profit. Should you start your business as a for profit or nonprofit? For a better understanding, read on to learn what's considered a nonprofit charitable organization.
For profit vs. nonprofit
For profit and nonprofit have different structures and desired outcomes. Here we'll compare and contrast these two business models.
While both aim to increase profitability, what differs is where the funds come from and how they are distributed. A for profit attracts investors who are interested in a return. Any revenue made will, in turn, go to said investors, as well as the owners and executives of the for-profit organization.
In a nonprofit, the revenue is geared toward the public and the organization's mission. Obtaining loans and investors is more of a challenge since it doesn't align with their goal. That is why nonprofits receive funding in the form of grants, sponsorships and donations.
Each business model has its fair share of paperwork. The standard corporate taxes and statements apply to a for profit, but nonprofits undergo public scrutiny and tax exemptions. Nonprofits are registered as a 501(c)3 organization, which allows them to provide services without being taxed. Any contributions made to the nonprofit are considered tax-deductible.
Due to public scrutiny, there's more pressure for nonprofits to disclose transactions and activities. Not only would it have to generate enough revenue to accomplish its mission and keep the organization running, but it has to exceed expenses when serving the public.
Ownership, staff and leadership
A nonprofit and its assets don't have owners, only founders; it becomes a public domain dedicated to the organization's charitable purposes. It's not controlled by anyone (not even the founder), but it's governed by a board of directors or trustees that serve as a group. The workforce also varies. Where a business would employ a paid staff, a nonprofit is sustained mostly by volunteers.
Expenses and costs
Both business models have similar expenses and the same requirement of resources, services and operating costs, but some needs set them apart. On top of costs that come with a for profit (administration, payroll, facilities, equipment, etc.), a nonprofit will also need to include fundraising, program service expenses and managing volunteers.
Characteristics of a successful and charitable nonprofit
The organization has a mission that focuses on one common goal or cause. Examples of purposes are (but not limited to):
- Environmental preservation
- Cruelty prevention
- Literary or education
- Science and research
Keep in mind that there are other types of nonprofit organizations other than charities. Other tax-exempt examples include your local federal union, civic leagues/social welfare, labor, agriculture, etc.
A reputable nonprofit will introduce who they are, their history, and their mission statement. According to Donorbox, the key to successful fundraising is communicating with donors by keeping them informed and involved in the organization. Whether it's through online platforms or campaigns, donors and beneficiaries should have access to nonprofit resources and tips.
All corporations need to be open about their internal operations, but more so an organization supported by the public, for the people. Nonprofits have the social obligation to uphold their mission and core values. By becoming the leading example, it can inspire others to take action.
Professionals in specialized fields, such as health and accounting, fall into the category of paid staff, but the foundation of nonprofits consists of volunteers and interns. Donating doesn't always mean writing a check. Not only do volunteers gain experience and contribute to the greater good, but it's also a means to support their favorite nonprofit when monetary donations aren't possible.
The control lies solely in the board of directors, but it only benefits the community. It's primarily fueled by the contributions and made possible by the public as a whole.
Pros and cons of a nonprofit
Is turning your business into a nonprofit the right choice for you? Let's weigh the advantages and disadvantages of starting a nonprofit organization.
Pros of nonprofit organizations
Tax exemption: Unlike for-profit businesses, nonprofit organizations are eligible for tax breaks. However, your non profit must have the listed purpose of community improvement and provide reports on your activities.
Limited liability: Similar to limited liability companies (LLC), nonprofit organizations are granted limited liability. Limited liability is legal protection, where a person's financial liability is limited to the value of a person's investment in a company or partnership. This protects individuals from liability or obligations within the nonprofit.
Funding through grants: Unlike loans from venture capitalists, funding from grants, donations, and other means don’t generally have to be paid back. This takes the burden and pressure off of making enough to provide a return of investment and focus on results instead.
The organization and the individuals are considered separate: Nonprofits shield actions of those within the organization by keeping individuals separate from the nonprofit. While someone's legal matters may negatively impact a for profit, nonprofits are unharmed and remain a public domain.
Intrinsic rewards: Intangible benefits far outweigh the dollar value of their services. Nonprofits and their employees achieve a sense of satisfaction in contributing their time and resources to a cause.
Cons of nonprofit organizations
Tax exemption isn't guaranteed: Proving nonprofit compliance is an ongoing and strict process. Once your business obtains nonprofit status, you need to regularly file federal and state paperwork to maintain your tax-exempt status.
Funds aren't guaranteed: You don't have the support of loans, investors and sales to keep operations running. Nonprofits solely depend on private donations, sponsorships and grants, among many fundraising methods.
Not as financially rewarding: All focus is directed toward the financial success of the organization. No one within the nonprofit is permitted to profit or benefit from the net earnings of the organization. You're only allowed to make money by other means or receive compensation for your efforts.
Increased public scrutiny: The nonprofit, and those within it, are watching closely for any suspicious activity. Not only will you be judged by how it benefits others, but your financial transactions and expenses will also be made public.
Now that you know what a nonprofit is and how it differs from socially aware companies, you can make an informed decision about your business goals. Think about your eligibility and your desired outcome. Whether you want to generate profit or contribute to a better world, you have to decide what aligns with your goals, values and interests the most.