Similarities Between For Profit and Not For Profit Businesses

“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.
  • As Corporations both have the advantage of Limited Liability.
  • To survive 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.
  • Both also have to generate money to pay their bills.
  • If the entity is to acquire new assets and grow it needs profits; both to use for this as well as to attract new investment.
  • 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).
  • Both are managed and run by the people who are employed by the corporation.

Differences Between For Profit and Not For Profit Businesses

1. Beneficiary:
For Profit: It is formed for the financial benefit of its owners and/or shareholders. Profit is the
goal and the business pays taxes on that profit.
Non-Profit: The entity has a mission that benefits the "greater good" of the community, society, or the world. It does not pay taxes, but it also cannot use its funds for anything other than the mission for which it was formed.

2. Investment:
For Profit: New investment is provided by the owner, outside investors, loans, and/or sweat equity.
Non-Profit: New investment takes the form of contributions from individuals, philanthropic organizations, other corporations, or the government in the form of grants. 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.

3. Profits
For Profit: Profits that are not re-invested in the organization are distributed to the owners of the corporation as cash or dividends.
Non-Profit: Profits are used to provide goods or services to the group or groups the non-profit was formed to help. Profits of a non-profit organization always go toward supporting some cause that society deems as good and beneficial.

4. Ownership
For Profit: A 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.
Non-Profit: In a non-profit, individuals come together and provide assets, money and/or talent to start the corporation. But, the people who create the corporation do not receive any legal ownership in the corporation and have no guarantee that they will be able to retain control of the corporation once formed. Non-Profits are created and run by individuals but not owned by individuals

5. Tax Exemption
For Profit: Corporations are subject to Federal & State Income Tax.
Non-Profit: If the entity qualifies for and receives 501(c)3 status from the Internal Revenue Service (IRS) it is not subject to Federal or State income taxes.

  • Many localities also exempt non-profits from local property taxes but this is a separate application necessary to be filed & granted by that city or county.
  • If merchandise is sold it is subject to State sales taxes. A State Sales & Use Tax Certificate should be obtained and the applicable sales taxes collected & remitted to the State.
  • Many localities do not require a Business License for non-profits. Check with your local licensing agency to determine if separate registration & exemption is required.

There are other advantages that can inure to non-profit organizations.

a. Eligibility to apply & receive grants from both private & government sources when Federal 501(c)3 is obtained.
b. The US Postal Service offers special rates to some non-profits. For details contact them.
c. Once 501(c)3 status has been obtained contributors can deduct these donations on their individual Federal income tax filings.
d. Some communities provide exemption from zoning requirements. Check with your local Metropolitan Planning Commission or Zoning Board.

Some other issues that should be taken into account when considering a non-profit start include:

a. Control: The non-profit is controlled by the Board of directors who are responsible for policy, planning, and the hiring and firing of the operating management.

b. Paperwork: The government requires considerable reporting for all Corporations whether "for profit” or non-profit”. For the non-profit a Federal Form 990 must be filed annually.
c. Unrelated Business Income: The non-profit corporation will pay Federal income tax if revenue is derived from sources unrelated to the mission/purpose of the organization.
d. Public Scrutiny: Because the organization is dedicated to the public good a non-profit’s finances are open to public inspection. This includes all revenue generated, expenses and salaries of employees. Thus good financial records should be maintained.

Source: Charles Christiansen, SCORE Counselor rev February 2013
Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive, royalty-free, unlimited license to use this copyrighted material. The material in this publication is based on work supported by the U.S. Small Business Administration under cooperative agreement SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author and do not necessarily reflect the views of the U.S. Small Business Administration. The information contained in this publication is believed to be accurate and authoritative but is not intended to be relied on as legal, accounting, tax or other professional advice. You should consult with a qualified professional advisor to discuss issues unique to your business.