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Taxes and Tax Breaks: The Differences Between Nonprofit and For-Profit Organizations

October 22, 2015

There are many differences between nonprofit and for-profit organizations, including taxes, organizational structure, and purpose.

Since the turn of the 21st century, nonprofit organizations have experienced rapid growth. According to The New York Times, nonprofits in the United States grew by 25 percent between 2001 and 2011, while for-profit organizations rose by just half of 1 percent. As of 2012, nonprofits accounted for 11.4 million jobs and 10.3 percent of all private sector employment. They contribute $887.3 billion to the country’s economy and comprise 5.4 percent of the gross domestic product.

Nonprofit organizations were created to fulfill certain benefits to society. Many offer health care services or focus on the needs of poorer Americans, which helps explain the recent growth in nonprofit organizations. In exchange, nonprofits enjoy tax benefits that for-profit organizations do not have. These and other features illustrate the primary differences between nonprofit and for-profit organizations.

Financial Characteristics of Nonprofit Organizations

For-profit organizations are focused on making the biggest profit possible by selling products or services. Taxes apply and surplus income is typically distributed to stockholders as profit or dividends. Nonprofits operate in a different fashion and enjoy specific financial benefits.

Revenue and Profits

Americans donated an estimated $358 billion to charity in 2014.
Like for-profit organizations, nonprofits earn income through products and services that are sold. However, nonprofits also rely on private contributions, government grants, grants from foundations, bequests, corporate philanthropy and more. Their largest source of income outside of products and services sold is private contributions, which in 2014 set a 60-year high of $358.38 billion, according to the annual report Giving USA.

Profits earned by nonprofit organizations are not distributed to shareholders. Instead, profits pay for reasonable salaries, expenses and activities that further the organization’s mission. Although income cannot personally benefit an individual in a nonprofit, salaries are not considered personal benefits. An excessive salary can undermine an organization’s nonprofit status.

Taxes

The biggest tax advantage for nonprofits is exemption from corporate income taxes. If the organization gains this status, such as with a 501(c)(3) designation, the nonprofit commonly receives exemption from similar state and local taxes. Other benefits include potential tax credits from the federal government, state governments and private institutions, as well as tax deductions for people who donate to the nonprofit. Additional information is available from the IRS.

Other

For financial reporting, for-profit organizations produce a balance statement to detail equity and company stock. An income statement is also created to show the company’s gains, losses, revenue and expenses. Nonprofit organizations do not produce a balance statement, as they have no owner. Instead, a statement of financial position outlines net assets, and a statement of activities lists revenue minus expenses.

One financial disadvantage that nonprofit organizations have is public scrutiny. Finances are open to public inspection because a nonprofit is dedicated to the public interest. The public can request copies of an organization’s state and federal filings to view salaries and other expenses.

Organizational Differences

Structure

No one owns a nonprofit organization in the way that shareholders own a for-profit corporation. A nonprofit is controlled by a board of directors, which elects officers who oversee business operations. Other governance differences are outlined in Strategic Finance.

  • Nonprofit boards are much larger, to help members develop in the organization and to have appropriate community representatives who can report what is happening within the community. Large boards of 25 to 30 members are not uncommon, with some exceeding 100.
  • Although for-profits may have just a few committees, nonprofit boards have many. In addition to audit, compensation and governance committees, nonprofit boards may add development, investment and facilities committees.
  • “The responsibilities and motivations of nonprofit board members couldn’t be more different from those of their for-profit brethren,” Strategic Finance saysNonprofit board members are not financially compensated and often are expected to contribute to the organization to the extent that many can’t afford being a board member. Nonprofit board positions also require a great deal of time and emotional engagement.

Mission

Perhaps the most important difference between nonprofit and for-profit organizations is the mission. For-profit companies have a mission but are primarily concerned with earning a return on invested capital. Nonprofits, many of which are rooted in the Christian faith, place considerable weight on financial topics, but their very existence and status as a nonprofit organization rests with the mission. The mission guides how the nonprofit benefits society, how it approaches money and how it meets any type of goal.

Culture

The difference in culture at nonprofits and for-profit companies is one of the biggest differences between the two.
“Working for a nonprofit is like living in a small town,” Rob Asghar writes in Forbes. “Working for a for-profit corporation is like living in a large city.” These analogies can typify culture in these organizations. According to Asghar, many in corporations tend to keep an eye on the financial bottom line, while those in nonprofits focus on a sense of community.

Although collaboration and the mission are strong in nonprofit organizations, other areas can be lacking. Generally, for-profit organizations offer optimal conditions for employees, as they are better able to invest resources in training, compensation and education. Andrew Yang, founder of the nonprofit Venture for America, explains in Business Insider that “incentives are different” for nonprofits and it’s easy to rely too much on intrinsic motivation.

Many nonprofit organizations do not fit into these common generalizations. For Yang, his nonprofit is focused on rewarding people at the market rate and allowing workers to build their careers there. He has succeeded through investing resources into the staff and in other areas, which is helping Venture for America achieve its mission to assist entrepreneurs.

Managing a Nonprofit Organization

Leading a nonprofit organization comes with challenges, such as hiring and managing staff, technology use, raising funds and creating the right culture. But with the correct approach, leaders can achieve maximum impact in the community. It requires commitment, knowledge and application of skills to carry out the organization’s mission efficiently.

The fully online Master of Science in Nonprofit Management from Grace College can help current and prospective business leaders implement best practices in a nonprofit organization. With the ability to learn online, students can complete their degree while they maintain their current schedules. Graduates of the program are prepared to apply their skills and knowledge to what they’re passionate about — and to make a difference.