There are many differences between the infrastructures of businesses when they come down to being a for-profit, non-profit, or a not-for-profit. Each of these business types are created for different reasons. The government regulates these types of businesses differently through taxes and other laws. There are strategical advantages and disadvantages between all of these types of businesses. In the following paper you will learn about the differences between For-Profit vs. Non-Profit vs. Not-for-Profit organizations.
The origin of what modern societies deem as business began in the first cities of Mesopotamia around 5000 B.C. where people began trading in order to distribute goods amongst families. Today, business is much more sophisticated with the complexities of monetary exchanges, equitable trades, and traditionally bases commodities exchanges. For profit businesses are started for innumerable reasons, but regardless of the businesses underlying goals, the ultimate purpose is for the entity to yield income for its owners.
A portion of the earnings of a for profit organization are intended to be re-invested into the corporation as ground work for an advantageous future, whether that be buying new machinery, investing in the market, or gaining assets like land and other equipment. The remaining profits are to be distributed to the business’ investors as cash. According to Bankers Online, for profit organizations have a single main goal: maximizing profits. This is the reason that the owners invest in the first place. Those who own a portion of the company wish to maximize their return on investment, whether their investment comes in the form of assets, talent, money, or tacit and explicate knowledge. The corporation is formed, in the eyes of the law, as a kind of fabricated or fictitious person, able to act as a separate entity from its owners. By creating this new “person”, the owners of the company are not directly liable for the consequences of whatever actions the company may take. This model of business allows the corporation to take title of the assets and investments that its owners have made and in exchange, the corporation gives the owners shares of the company. Shares are distributed relative to the size of investment made by the owner in most circumstances. Ultimately, the owner can do as they please with the shares, which usually constitutes acting in whichever way that will capitalize on the share’s price or benefit.
For Profit corporate tax is imposed at the Federal, state, and local level. Determinations of what is taxable and at what rate are made at the Federal level in the U.S. tax law. Federal corporate income tax is imposed at graduated rates, and vary from 15%-35% on taxable net income. State and local rules will differ by area, though they are based on Federal outlines. Like individuals, corporations must file tax returns every year. Corporations may choose their tax year (generally 12 months or 52/53 weeks), and they need not conform to the financial reporting year or the calendar year. Many, but not all states incorporate Federal law principles in their tax laws to some extent. Some types of for profit corporations (S corporations, mutual funds, etc.) are not taxed at the corporate level, and their shareholders are taxed on the corporation’s income when it is recognized. For corporations incorporated in Texas, there is a Texas franchise tax that is imposed on each taxable entity chartered in Texas or doing business in Texas. For franchise tax purposes, the term “corporation” also includes a bank, state limited banking association, savings and loan association, limited liability company, professional limited liability company, a corporation that elects to be an S corporation for federal income tax purposes, and a professional corporation. Professional associations and partnerships are not subject to the franchise tax. For Profit corporations pay the greater of the tax on net taxable capital or net taxable earned surplus. Taxable capital rate for Texas is at 0.25% per year and is defined as: a corporation’s stated capital plus surplus. Surplus means the net assets of a corporation minus its stated capital. Taxable Earned surplus is at 4.5% per year and is defined as: corporation’s federal net taxable income, plus compensation paid to officers and directors of the corporation. S corporations and corporations with fewer than 36 shareholders are generally exempt from the compensation add-back. Corporations that owe less than $100 do not pay any tax. (IRS, Texas Comptroller of Public Accounts)
Legal Ownership, Entitlements, and limited liability
Since the general motivation of a for profit company is to make money, the owners are motivated by generating cash flows, in turn hopefully generating returns for the shareholders. The Dictionary of Sustainable Management states that one of the major differences between for profit and non-profit organizations is the composition of the board of directors. The board of directors is given permission by the organization to make decisions, such as appointing CEOs, and running the business in general. Both types of corporations, the original board of directors is usually made up of those investors who started the company. These original board members are also given specified fixed terms as well in both cases. However, when time comes to reinstate or replace members, for profit and nonprofit organizations behave differently. The nonprofit organization goes about this process by simply allowing the board to decide whether or not a member should be reelected or replaced. Each member of the board is allotted one vote. Occasionally, non-profits will allow members of the organization to vote in these election, in which case their vote can almost be treated as a share in the company, representing the portion the of the organization that they “own” in a temporary sense. However, this election process is quite different in a for profit organization. When it comes time for election of the board of directors, the amount of shares each owner holds becomes especially important. Each share is seen as a vote, entitling owners of stock to as many votes as shares they possess. This gives investors holding great numbers of shares an incredible advantage in dictating how the company will be run. When a single person or entity owns 51% of the shares, this person is seen as having the controlling vote in both the business itself and in the election of board members, though this is not necessarily a typical occurrence. By allocating votes based on ownership investment, for profit corporations are much more susceptible to what interests their investors have, making for profit organizations even more appealing.
For profit organizations also compensate their employees generally well. Funding allows these companies to give their employees benefit packages, paid vacation time, bonuses and other motivating monetary incentives, which are believed to make the employees work more diligently and show stronger commitment to the corporation.
Another benefit for profit organizations possess is the ability to serve any function or purpose. Laws restrict which fields of work non-profit organizations are allowed to be invested in, but for profit organizations have no such restrictions apart from basic legal restrictions such as illicit substance distribution or other illegal activities.
For profit organizations can also contribute to political campaigns and are able to lobby as heavily as they wish. Many large for profit organizations use this advantage in order to ultimately create gains in their businesses. Overall, the most obvious and valuable benefit of a for-profit corporation is the generation of income for the investors. This is the most distinct advantageous difference between for profit and non-profit organizations.
Whereas most non-profit organizations fall under entities that are exempt from a variety of taxes for various reasons, for profit companies pay federal and state income taxes, sales and use taxes, and property taxes, and are often charged under many other mandates. This greatly reduces the overall bottom line that the business reports which could in turn affect the overall prosperity and stock value.
Missed Special Rates
Non-profit corporations experience a surge of advantages when it comes to attaining discounts and special or even preferential treatment. The postal service offers discounted rates to a number of categories of non-profits, and media gives advantageous benefits as well. Most newspapers, radio stations, and other various media give discounts to non-profits, some even allowing public service announcements to run for free. Nonprofits are also able to attain food stamps and food bank services. None of this is available for the for profit sector of business.
Contributions made to for profit businesses are not only taxed, but they are not able to be deducted on tax returns for the investors. This is one of the greatest appeals that non-profits have, but it exacerbates the fact that for profit businesses share in none of these advantages.
Only certain types of businesses are allowed to operate in distinct areas in many communities. There are many laws and mandates restricting where for profit businesses are able to conduct business, but non-profit organizations are able to function in any area of town or neighborhood without having to concern themselves with strict zoning requirements.
The foundation of Non-profit/Non-for-profit organizations can be traced back to the Roman Empire and Biblical times. Philanthropy was the first reason in creating the non-profit sector. Some of the first instances were in the Roman Empire, in which the government regulated how much would be given throughout the community. “Great Latin authors such as Cicero and Seneca put forth rigorous manuals on the arts of giving and receiving gifts.” (The Nonprofit Sector, 17) These writers told the donors the best intentions, types, and tasks of charitable giving that were essential in preserving society. During this day in time, people believed that philanthropy was necessary to maintaining an ever changing society. Early Jewish landowners were required through their religion to “reserve untouched field corners for the gleanings of the poor at the end of the growing periods.” (The Non Profit Sector, 14) The emphasis of Christian origin is selflessness and hospitality. In the Bible, Deuteronomy 15:7-8 says, “If there is a poor man with you, one of your brothers, in any of your towns in your land which the LORD your God is giving you, you shall not harden your heart, nor close your hand from your poor brother; but you shall freely open your hand to him, and shall generously lend him sufficient for his need in whatever he lacks.” This verse acknowledges one’s moral obligation to provide for those that are less fortunate as you. Present day nonprofit organizations owe their establishment and continued support to “public-spirited” generosity of philanthropists. These philanthropists base their monetary and volunteer giving to these groups based on moral and/or spiritual beliefs. In the following section you will begin to understand the ends and outs of the nonprofit sector. (The Non Profit Sector, Powell) As expressed by the Internal Revenue Code the following motives for exemptions are: “charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety.”
Both Non-profit and Non-for-profit conduct business for the public good through the use of workers, donors, and volunteers who allocate their profits to benefit other individuals, groups and causes, not shareholders.
While Non-Profits and Not-for-Profits are very similar, there are small distinctions with how they are taxed on the federal, state, and local level.
Not for Profit – 501(c)(4)
Not for Profit corporations do not have to pay any federal taxes on any net income that the company earns, however state tax-exemption varies state by state. They have to meet certain requirements in order to be registered as a Not for Profit 501(c)(4) organization. On the Internal Revenue Services’ website a “Not for Profit organization 501(c)(4)” has to be a “Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare” or ” Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.”501(c)(4) organizations are only categorized as a public charity. Donations to 501(c)(4) organizations generally are not deductible as charitable donations, but they may be deductible as a business expense. Texas state law allows many types of organizations to be exempted from paying sales tax, hotel occupancy tax, and, if incorporated, franchise tax. All 501(c) organizations are not automatically exempt from Texas state taxes. However, If an organization has received exemption from federal taxation under 501(c)(3), (4), (8), (10) or (19), it qualifies for exemption from sales tax and franchise tax if incorporated.
Non-Profit – 501(c)(3)
Under most circumstances, a Non-profit organization will file as a 501(c)(3) organization for exemptions purposes and benefits. The 501(c)(3) is a federal tax exemption status under which an organization can receive exemption from federal income tax and eligibility to receive tax-deductible charitable contributions. Individuals and corporations will make contributions to organizations filed under this status to ensure that their donation is not taxed. To meet the requirements to file under 501(c)(3) the entity must be controlled and run entirely for one or more than one exemption purposes. The majority of non-profit organizations are charitable, educational, and religious. Every organization that is sanctioned under section 501(c)(3) status is further categorized as either a private foundation or a public charity. Intentionally most organizations are classified as private. This categorization is imperative because different tax rules apply to the function of each. Deducting donations for a private organization is more limited than donations to a public charity. Exemption from State taxes varies from state to state, but under Texas law a church is not inevitably exempt from state taxes. A religious organization must apply to the Texas Comptroller for exemption. According to the Texas Comptroller of Public Accounts “a nonprofit religious organization must be an established congregation regularly meeting at a particular location to hold, conduct, and sponsor religious worship services according to the rites of its sect.” (IRS, Texas Comptroller of Public Accounts)
As mentioned above, the biggest and most beneficial reason to start up a non-profit/Non-for-profit is that these businesses are exempt from paying federal corporate taxes on their income. In many areas, a federal exemption will be accompanied by an exemption from state and local taxes. You must apply with the IRS to fall under the tax-exempt revenue code: exempt status for non-profit is usually reserved for churches, charities and community organizations. Once you have achieved tax-exempt status, you will have fewer expenses and can put more money into growing your business. This leads into benefits of more usable cash flows.
Because there are no shareholders in a non-profit organization, there are no required dividends to be paid out if the business begins to grow. This allows the organization to have larger percentages of total revenues to reinvest back into the business and keep cash flows positive. Not only does running a nonprofit organization benefit you, it also benefits the donors to your organization. Donors are allowed by the government to write these “giving expenses” and the donor will be able to take a deduction off their income taxes. This donor tax benefit can be used as an incentive to raise future capital for the organization.
The Nonprofit/Non-for-profit organization acts as a corporation, which means a nonprofit will receive all the rights and fortification that are associated with corporations. “A corporation acts as its own legal entity and offers protection to its board of directors from any liability in litigation against the business.” So even though the nonprofit is not a for profit corporation, it is protected as if it was one.
As a Non-profit/Non-for-profit, you are eligible to a multitude of government and private grants. These have a variety of requirements for eligibility. “A federal grant is an award of financial assistance from a federal agency to a recipient to carry out a public purpose of support or stimulation authorized by a law of the United States. Federal grants are not federal assistance or loans to individuals.” (Grants.gov)
“The public is more willing to offer money, time, or do business with a nonprofit because of a real perceived view that your organization is founded and operated in the public interest.”Because the organization is doing something good in the donor/consumers eyes, they will more likely support you than similar for-profit businesses.
“Certain types of Nonprofit/Non-for-profit organizations can go into any neighborhood without concern about the zoning requirements. Most for-profit organizations have to apply for approval or a variance, or fight the neighbors who don’t want their clients in the neighborhood.”
Loss of ownership
Because nonprofits do not return dividends to the donors and reinvests all profit back into the company or donates it to charities, ownership is lost in this process. Ownership is owned by the public because they are the ones donating to run the organization.
There are many legal requirements when filing to become a nonprofit organization. One must know the difference between local, statewide, and national filings to be recognized as a nonprofit. This can be very tedious and over-whelming for a single individual running an organization
Nonprofit organizations have limited functions under law. These organizations are only allowed to use their revenues in certain areas, where as a for-profit corporation is allowed to spend it as needed.
Non-profit Hospital vs. For-profit Hospital
For-profit health care providers claim they can provide better care at lower cost due to their focus on efficiency. But critics say for-profit hospitals are successful because they tend to serve wealthy, insured patients and focus on highly profitable specialties such as cardiology and elective surgery. They will typically avoid unprofitable areas such as emergency care, which often is used by poor patients for their basic health. The for-profit hospitals’ focus on efficiency has raised questions of whether cost-cutting impacts consumer health.
Board of Directors: Assembly of persons given permission by the organization to make decisions, such as appointing CEOs, and running the business in general
Controlling Vote: When a single person or entity owns 51% of the shares, this person is seen as having controlling vote the in both the business itself and in the election of board members
For Profit: For profit organizations have a single main goal: maximizing profits
Grant: A federal grant is an award of financial assistance from a federal agency to a recipient to carry out a public purpose of support or stimulation authorized by a law of the United States. Federal grants are not federal assistance or loans to individuals
Non-Profit (501(c)(3): an organization not seeking profit and which does not disgorge income in excess of expenses to its members, in the form of dividend.
Not-for-Profit (501(c)(4): Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare or , Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
Private Foundation:IRC 509(a) defines a private foundation as an organization described in IRC 501(c)(3) other than an organization
Public Charity: Organizations described in IRC 509(a)(1) and (2) are also known as “publicly supported organizations. Public charities generally are either organizations that have broad public support or that actively function in a supporting relationship to publicly supported organizations.
Valley Hospital/Englewood Hospital
Non Profit Sector
Texas Comptroller of Public Accounts
Small Business: Find Law
Authors Sharing Their Best in Business
The Dictionary of Sustainable Management