Differences of For-Profit and Nonprofit Clients

Recently, an AccountingWeb reader asked, “What are the main differences between a for-profit and a not-for-profit company business structure?”

First, it’s helpful to know that there are different varieties of for-profit and nonprofit companies. For example, a for-profit might operate as a sole proprietorship or general partnership. Or, it might be formed as a limited liability company (LLC) or corporation.

A not-for-profit organization could be one of many types of nonprofits. The most known and commonly operated is the 501(c)(3), which includes charitable organizations, religious organizations, private foundations, social welfare organizations, labor organizations and various other types of organizations. 

Rules, regulations, tax implications and other considerations vary depending on the type of business and where the organization operates. Because there are so many variables and nuances, business owners and organizers should consider consulting with a licensed attorney and tax professional for guidance.

In this article, I’ll cover some of the basics on how operating as a for-profit company differs from running a non-profit organization.

Characteristics of For-Profit and Nonprofit Companies

For-Profit Businesses

Below are several hallmarks of a company that is “for profit.”

• The company is registered with the Internal Revenue Service and appropriate state agencies (and possibly local) for filing returns and paying income taxes based on net income. 
• The business exists to generate profits for the organization’s owners by developing or offering products or services that are attractive to consumers.
• Generally, initial funding comes from bank loans, local investors and revenue generated from sales.
• At a small business, the company’s owners lead most or all aspects of the company. At a large corporation, stakeholders and a board of directors oversee the business, mainly focusing on revenue and profits to appease shareholders.
• The business’s workers include paid employees and independent contractors. 

 Not-for-Profit Organizations 

 Typical characteristics of a nonprofit organization include:

• It is established to fulfill the objective of advocating for a charitable, social or environmental social cause. The purpose of its existence is to provide a public benefit. 
• The organization is initially funded by one or more of the following: private donations of time and money, corporate sponsorships, government grants or crowdfunding.
• It is led and directed by a board of directors. Usually, that governance body is primarily concerned with balancing the organization’s financial concerns with its commitment to furthering its cause (e.g., addressing social or environmental issues).
• Its workers might include hired employees and independent contractors. However, a nonprofit organization is usually heavily dependent on volunteers as its primary source of human resources. 
• The organization is considered tax-exempt by the Internal Revenue Service and the state(s) where it operates. 
• The non-profit may be responsible for state and property taxes. 
• The organization may be subject to unrelated business income tax (UBIT) if it conducts an activity that:

1. Can be categorized as a trade or business, 
2. Is regularly carried on, and 
3. Is not substantially related to furthering the exempt purpose of the organization.

Final Thoughts

Keep in mind that in addition to the IRS’s rules and regulations, states have their own requirements for starting and operating for-profit and nonprofit companies. Business owners should do their homework and seek the advice of qualified legal and tax professionals to understand the laws and tax regulations that apply to them.