For Profit vs Non-Profit Form of Business

For profit and not for profit (or non-profit) businesses are similar in many ways. Both are generally corporations in which assets are held and business transacted in the name of the corporation rather than the individuals involved.

To survive and grow, both need to generate or bring in more revenue than they spend on operations. Both are involved in producing a good or service for society.

And, of course, both are managed and run by the people who are employed by the corporation.

The first, and most important difference between a for profit and non-profit business is the profit. As mentioned above, both have to generate a profit in order to survive and grow.

Both also have to generate money to pay their bills.

If the corporation is to acquire new assets and grow it needs profits both to use for this as well as to attract new investment.

In the case of a non-profit, new investment takes the form of contributions from people or other corporations and people are just as reluctant to contribute money to a failing charity as they are to invest in a bankrupt corporation.

In both cases some of the profits are re-invested in the organization (although laws, especially tax laws, place limits on how much non-profits are allowed to re-invest) either to replace aging and worn out assets (buildings, machinery, etc.) or to acquire new assets needed to expand the organization's operations (such as a religious group building a new and larger church to accommodate a growing congregation).

However, it is the distribution of the remainder of the profits that is one of the differentiating characteristics between for profit and non-profit organizations.

In a for profit organization the profits that are not re-invested in the organization are distributed to the owners of the corporation as cash.

In the case of a non-profit organization the profits are used to provide goods or services to the group or groups the non-profit was formed to help.

A religious organization may use the profits to help its members or others obtain food, medical care, education, etc. A university may use its profits to provide free or low cost education to some or all of its students.

The point is that the profits of a non-profit organization always go toward supporting some cause that society deems as good and beneficial and not into the pockets of the investors.

The second difference, which explains the first, is ownership of the corporation.

A for profit corporation is created when investors get together and transfer assets, money and/or talent to start the corporation. The corporation, which is actually a fictitious person in the eyes of the law, takes title and ownership of the assets, etc. and gives, in exchange for the assets, ownership shares in the company to those who contributed the assets.

In the case of a a non-profit, individuals come together and provide assets, money and/or talent to start the corporation. But, these people who create the corporation do not receive any legal ownership in the corporation and, further, have no guarantee that they will be able to retain control of the corporation once formed.

All of the assets are now to be used to advance that cause or provide the service for which the non-profit business was created as determined by the corporation's board of directors.

The composition of the board of directors is the third major difference between for profit and non-profit businesses.

In both cases the original board is created by the same people who started the corporation and, in both cases, directors are given fixed terms.

Things change when it comes time to re-elect or replace these board members. In the case of a for profit corporation each share of stock entitles its owner to one vote and owners of multiple shares have multiple votes. It is possible for the person or group owning 51% or more of the stock to control both the board and the business with their controlling votes.

In the case of a non-profit corporation there are no shares and thus no owners of shares to vote. When a board member's term is up it is the remaining board members who decide to either re-elect that person to a new term or replace the person.

In organizations which have a defined membership, it is usually the members who elect the board. In this case each member only has one vote and membership does not give them an ownership right in the assets of the organization.

Members also cannot sell their membership like a stockholder in a for profit corporation can sell their stock and the rights that go with it. It is the board of directors or members which makes the decisions and runs the corporation.

For profit business generally have a single focus and that is to make money for their owners.

Non-profits are more varied. Some are pure charities which are created solely to give money or services away to those in need.

Churches and other charitable organizations are examples of this type of non-profit.

Other non-profits are merely an efficient way for a group to accomplish a goal that is not directly concerned with making money for the members. An industry trade association would be an example of this.

The goal is to promote the industry thereby increasing the sales, and profits, of the member businesses. However, the trade association itself is not designed to generate profits to be distributed to its members.

Business is concerned with the management of resources to meet society's needs and, since society's needs are numerous and varied, the tools used to accomplish this are also varied.