To Profit or Not to Profit?

by Joshua Botello

Non-profits are some of the noblest organizations to help communities all over the United States. The National Council of Nonprofits describes nonprofits this way: “America’s 1.3 million charitable nonprofits feed, heal, shelter, educate, inspire, enlighten, and nurture people of every age, gender, race, and socioeconomic status, from coast to coast, border to border, and beyond... They foster civic engagement and leadership, drive economic growth, and strengthen the fabric of our communities. Every single day.” While some look to build a business others look to starting a nonprofit organization to make a living, by helping the community. Here is a list of the major differences between for-profit companies and nonprofits, if you are looking to start a nonprofit of your own.

Profits

The biggest myth with non-profit organizations is that unlike for-profit companies that can’t make a profit. The term non-profit is somewhat of a misnomer. Non-profit organizations can make a profit and are encouraged to do so, but the only difference is how those profits are utilized.

While for-profit companies typically will pay those profits out in the form of dividends to stockholders or as distribution to owners, for-profit companies will often reinvest to grow the company. This is similar to how non-profits are to use their funds. By law, non-profits are to use their profits and reinvest them into services for the community. The non-profit should also retain a cash reserve to service payroll and services toward the mission of the organization. 

Ownership

While for-profit companies can be in multiple forms and can be owned completely by individuals, Non-profits have a very specific structure. Most non-profits are corporations with a tax-exempt status of 501(C). There are nearly 30 different types of 501(C) formations with 501(C)(3) being the most common. As a non-profit corporation, the entity cannot be owned by a single individual. It is run by a board that approves the direction, services, and expenditures of the organization. If any person was looking to start a non-profit, they would have to relinquish control to the board members that are usually community members or highly qualified individuals to run it. 

Employees

If you think most people who for non-profits work completely of the goodness of their heart, you would be wrong. While there are many volunteers in non-profit organizations, they do have paid employees to run essential operations just like for-profit companies do. In fact, according to the Bureau of Labor Statistics as of 2016: Nonprofits account for 12.3 million jobs or 10.2% of private employment in the United States. Nonprofits are just like other for-profit employers, they need to to provide competitive wages to attract and retain quality employees to run operations. 

Funding

If you think for-profit companies or the government are the major sources of funding for nonprofits, think again. Many nonprofits actually charge for services they provide, even if only a nominal fee. 49% of all revenue earned from nonprofits is through fees for services, while only 14% of revenue is donations.

Costs

Not all nonprofits are behemoths like the Red Cross or United Way. In fact, most nonprofits are operating with small budgets and personnel. Only about 8% of all nonprofits report revenues over $1 million dollars and are not representative of the nonprofit community as a whole. In reality, 92% of all nonprofit organizations report less than $1million dollars in revenue, seen in the chart below. 

So, if you are looking to start your own nonprofit, it is easy to overlook these aspects or be misled by “conventional wisdom” when you are looking to make an impact on the world. If you are looking for more information or resources to start your own nonprofit, you can visit the National Council of Nonprofits, to see if starting a nonprofit organization is right for you.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.