Should You Start a Non-Profit or a For-Profit Company?

What you’ll discover:

What qualifies a company as “non-profit”?
What is the difference between a “non-profit” and a “not-for-profit” organization?
What are the primary distinctions between a for-profit and a non-profit organization?
How do you create a non-profit organization?
Which entity is best for your company?

Choosing whether to run your business for profit or non-profit is a huge choice. You must determine if your priority will be to serve others or to benefit yourself. Although you can do both in many cases, there are benefits to forming a corporation that is officially recognized as a non-profit, such as the fact that non-profit enterprises are tax free at the federal, state, and local levels. But, you must weigh those benefits against the fact that you may need to be compensated differently as the owner of this sort of business.

Consider the following criteria when considering whether to form a non-profit or for-profit business entity for your company.

What qualifies a company as “non-profit”?

Non-profit organizations are exactly what they sound like—profits from this firm will be returned to the community rather than to executives or the business’s owners. National charities, hospitals, foundations, and colleges are some of the most prevalent instances of non-profit companies.

Further strict rules apply to non-profit organizations. These regulations are essential to guarantee that for-profit firms do not take advantage of the large tax breaks available to non-profit organizations in the United States. Non-profit organizations, for example, are compelled to make their financial and operational information public. Donors may see how their money is being used thanks to this level of openness.

A non-profit organization is generally known as a 501(c)(3) organization, which refers to the section of the federal tax law that exempts these organizations from federal income taxes. This certification is significant because it permits contributors to deduct donations to your organization from their income taxes.

Further advantages of creating a non-profit organization include:

Directors, officials, and members are only subject to limited responsibility.
Access to certain government and private funding.
Postage rates are low.

Donors are far more likely to make gifts if they can deduct them from their income taxes, therefore this sort of arrangement is particularly tempting to individuals who want to help their community or offer another social benefit.

What is the difference between a “non-profit” and a “not-for-profit” organization?

Remember that a non-profit and a not-for-profit organization are not the same thing. Although both prohibit owners from profiting, the emphasis on serving the public is not the same. A non-profit organization is not necessary to serve the general public. It is instead intended to serve the aims of its members rather than the public good.

A sports club is a frequent example of a non-profit organization. Some of the same tax breaks apply to this form of company, but contributions are not tax-deductible.

What are the primary distinctions between a for-profit and a non-profit organization?

The most significant distinction between for-profit and non-profit enterprises is most likely how revenues are utilized. Yet, there are some important differences.
Getting Investors

Investors in a for-profit corporation are not the same as individuals who contribute to a non-profit organization. Investors who contribute funds to for-profit businesses anticipate a return on their investment. Those who donate money to non-profit organizations, on the other hand, do it either out of altruism or to get a tax break for their contribution.

In certain cases, it might be far more difficult to recruit investors in a non-profit firm since such investors must anticipate very little in return for their investment.
Employees, Ownership, and Leadership

Non-profit organizations often exist because volunteers desire to aid the company’s purpose. They may, however, still hire people. The majority depend primarily on volunteers or part-time employees.

A for-profit organization, on the other hand, will almost never depend on volunteers. Alternatively, they may have a well-paid staff and leadership team to operate the business.
Transparency and Costs

Non-profit organizations may face added pressure to spend money wisely since their books and records are visible to supporters. Although both companies seek to generate more money than they spend, non-profits face additional scrutiny since they must notify contributors precisely how their money was spent. Most for-profit firms just do not have this kind of openness.

How do you create a non-profit organization?

Starting a non-profit organization is analogous to founding a company. You will write a business strategy, choose a name for your firm, and draft articles of incorporation. Read more about starting a non-profit organization.

Which entity is best for your company?

A non-profit organization’s objective is considerably different from that of a for-profit organization. The correct entity will be determined by your overall business aims. Although non-profit businesses provide major tax advantages and other financial advantages, only you can determine how to spend the proceeds of the firm.

If you have doubts regarding business entities and which option is best for you, consult with a lawyer to determine which option is best for your individual case. An attorney can help you weigh the advantages and drawbacks of each choice and create whatever corporation you like.