Differences Between For-Profit and Nonprofit Business Structure

For-profit entities typically look for ways to increase revenue and give funds to stakeholders. Not-for-profit brands focus more on a cause or mission and may or may not be profitable.

One big advantage for nonprofits in the United States is being exempt from federal income taxes. Raising funds may be easier, as donors can also claim their contributions as charitable giving.

Nonprofit organisations tend to focus on action and results rather than profit. However, a well-run one will have ample funds to pay leadership and keep the mission going.

Things to Consider When Deciding Between For-Profit and Not-For-Profit

Deciding how to structure your business is complex. Filing paperwork with the secretary of state and establishing a board or leadership committee takes time and effort. Ideally, you’ll stick with what you select rather than spinning your wheels restructuring. Here are some aspects to consider when choosing between for-profit and nonprofit.

1. Money Raising Ability

A recent research study that surveyed 1,000 nonprofit leaders found 70% of nonprofits need more money to operate than they did two years ago. Charitable groups are limited in the ways they can ask for money and use those funds. The tax-exempt status of a 401(c) comes with a lot of paperwork and regulations decision-makers must navigate.

For-profit companies have the ability to take on investors and utilise angel funds to expand or keep afloat. While it eventually has to pay stakeholders back, the initial infusion of cash can get it over a growth hump and keep it afloat.

2. Mission Focus

Before choosing a nonprofit or profit status, consider the brand's mission. If the primary purpose is to help the local community somehow, you may want to select a nonprofit structure. On the other hand, an enterprise can wish to benefit others but still bring in a profit. Carefully consider your goals and whether they sound more like a charity or a business.

3. Control

With a for-profit entity, leadership maintains full control over decisions in most instances. With a nonprofit, a board of directors tends to make decisions via voting. The leadership style can make or break how well the business functions.

Researchers have found organisational and environmental factors impact the performance of a board. While active engagement doesn't equal excellence, a two-tier governance system can improve performance and lead to more success for the not-for-profit group.

Before choosing a structure, consider how hands-on you want to be. Even if it is better suited to be a nonprofit, you can structure things so there are checks and balances to ensure success.

4. Profit Distribution

With a not-for-profit, any gains must be reinvested to benefit the organisation. With a for-profit company, you will want to invest a percentage of profits to keep growing, but you can also distribute funds to shareholders.

While the president or other leaders – including the board – may receive a salary or stipends, donors may ask questions if the amounts are higher than is normal for the industry. You can run a highly successful brand, but you can’t benefit from extreme growth if it is classified as a nonprofit.

Decisions Are Never Final

Choosing a for-profit or nonprofit is complex. Although it requires a bit of paperwork and extra tasks, if you find the current structure isn’t working, you can always dissolve the business and restructure to the opposite setup. Being able to scale to something bigger than you ever dreamed is a gift, but may require tough structural changes along the way.