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Differences between Nonprofits and For-profit Businesses

As you might expect, nonprofits and for-profit businesses differ in many areas including: mission, source of revenue and use of profits, decision-making, governance and style of operation. Understanding these differences is especially important for board members who work in the for-profit business sector.

Perhaps the most important of these is the mission. Non-profits were created to perform a service for the benefit of society or the "public good." For performing this service, the U.S. public, in general, places its "trust" in these organizations and exempts them from taxes on income left over after expenses are paid. In short, the purpose or mission of a tax-exempt nonprofit organization is its legal reason for existing.

The purpose of a profit-making business is just that--to make the biggest profit possible by selling its products or services.

Sources of Revenues and Use of Profits
The sources of revenues for the nonprofit organization are: individual cash donations, in-kind gifts of service or physical property, and grants from individuals, foundations and corporations for which the donors receive a tax deduction. To a lesser extent, they may also include fee for services or sales of products. In the case of nonprofits, profits “shall not inure to the benefit of its directors." This doesn't mean that there are no profits (moneys left over after all expenses are paid). It simply means that the funds left over are not disbursed to the "stockholders" but rather are reserved to perform additional activities and programs consistent with the nonprofit’s mission.

The source of revenue for profit-making companies is investors or stockholders, and payment for services and/or products from the general public. For non-tax-exempt businesses, profits are typically paid out to stockholders in the form of dividends or reinvested into the business for improvements and expansion.

Both nonprofit and profit-making organizations are run by a "board of directors" (although, with nonprofit organizations they may be called a "board of trustees" or a “board of governors”).

For-profit companies tend to have small and efficient boards whose responsibility it is to protect the company's assets and maximize its profits for the benefit of the shareholders. Board members are generally chosen for their competence and business acumen, which they use in setting broad policy.

The nonprofit board typically is larger than the for profit board and drawn from more diverse constituencies. As a result, they may seem less efficient. Nevertheless, they perform their work in ways that neither the business sector nor government can:
• Timely
• With compassion/passion
• With specialized skills.

Nonprofit boards are responsible to the organization's members, donors, funding agencies, the government and the tax-payers. Their broad responsibilities include ensuring that:
• The organization achieves its purpose or mission
• The organization has systems for managing and governing, and
• The organization has adequate resources to conduct the other two functions.

Decision Making
Decision making within a profit-making corporation is fairly clear-cut. Once it is made it is carried out. If problems arise, it is up to management to solve, but the business stays in "control". Decisions are based on profit and loss. Decision making in the nonprofit world, however, is broader. Many constituencies may play a role, including the target beneficiaries of the product or services, the funders, the government and the public-at-large. Cost-effectiveness is weighed against public benefit and societal values.

Style of Operation
For profit businesses typically are staffed and equipped at a much higher level than nonprofit organizations. Management and supervisory staff often have education and training in management as well as in a technical area. Efficiencies are sought to streamline systems and increase productivity. The nonprofit culture, on the other hand, generally operates under less than optimal circumstances because of lack of funding. These include:
• Lack of staff
• Use of volunteers
• Lack of training for staff & volunteers
• Inefficient or out-dated systems and equipment.
• Significant gaps in technology and systems
• Inadequate facilities
• Inadequate financial resources to deal with emergencies, new developments and ever-growing number of clients.

Within this context, nonprofits are usually very committed to carrying out their missions. Without there efforts the public would suffer in very real ways. There are many nonprofit organizations that have all volunteer staff or a single paid executive director or part-time executive director. The leaders and top staff of nonprofits are motivated, hard-working individuals who often have expertise in a field directly related to the mission of a nonprofit, but may have very little expertise in management.

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