What is a for-profit organization example?

Índice Show

Key Differences
For-Profit vs Nonprofit Comparative Table
Final Thoughts
Recommended Articles
What is a nonprofit organization?
What is a not-for-profit organization?
Nonprofit vs not-for-profit organizations
What is a for-profit organization?
Can you change your legal entity?
From nonprofit to for-profit
From for-profit to nonprofit
Which legal entity is the best?

Nonprofit Organizations are those incorporated not for earning some income from their activities. Rather their primary motive is to enable activities that are generally for aiding or advancement of the society at large and are not required to pay taxes. In contrast, For-Profit Organizations are those entities incorporated with a primary objective of earning economic and monetary benefits either directly or aiding in that process.

Many individuals believe that nonprofit organizations don’t make any profit. It is a myth. And only for-profit organizations make a profit. The actual difference doesn’t lie in making profits; rather, it lies in handling them.

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Source: Nonprofit vs For Profit Organizations (wallstreetmojo.com)

For nonprofit organizations, society comes first; personal motives come next. For-profit organizations, it’s just the opposite. Other than handling the profits, these two organizations are different in scope also.
For nonprofit organizations, the sources of revenue are subscription, membership fees, donation, etc. For-profit organizations, the sources of revenue are selling goods and services. Even the seed capital for nonprofit organizations comes from the government grant, donations from HNI (high net-worth individuals), etc. Whereas in for-profit organizations, the seed capital is usually provided by the partners or the business owners.
If we talk about financial statements for nonprofit organizations, cash flow statements, income statements, and balance sheets are used. And if we think about nonprofit organizations, we use receipts & payments accounts, income & expenditure accounts, and balance sheets.
In regards to taxes, for-profit organizations need to pay taxes. Nonprofit organizations are exempted from paying any taxes. Since the profit-making organizations make profits for their benefits, the Government levies taxes on them. But because nonprofit organizations make profits to help society at large, they’re given the benefit of no tax payment.
The culture of these two types of organizations is also quite different. In the case of profit-making organizations, the culture is all about deadlines, finishing projects as quickly as possible for clients, adhering to different KPIs (key performance indicators). On the other hand, the organizational culture is quite different for nonprofit organizations. The culture values the members’ contributions and how much each member can contribute even beyond the daily schedule of work.
In the case of profit-making organizations, the ideal buyers are targeted. Otherwise, the motto of selling to the right audience will not be achieved. On the other hand, nonprofit organizations have a broad audience view. In most cases, people can join, contribute, become members voluntarily.

Let’s see the top differences between For-profit vs nonprofit organizations.

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Source: Nonprofit vs For Profit Organizations (wallstreetmojo.com)

Key Differences

The for-profit organization is built to serve the business owners. The nonprofit organization is built to serve society at large.
Profit organizations can be in a company, sole proprietorship, or partnership. A nonprofit organization can be in trust, clubs, society, committees, etc.
Profit organizations make a profit by directly/indirectly selling goods or services. Nonprofit organizations can sell goods/services, mainly through donations, subscriptions, or membership fees.
The financial statements prepared by for-profit organizations are the income statement, the balance sheet, and the cash flow statement. The financial accounts prepared for nonprofit organizations are the receipts & payment account, the income & expenditure account, and the balance sheet.

For-Profit vs Nonprofit Comparative Table

Basis for comparison	For-profit organizations	Nonprofit organizations
Purpose	To make profits for one’s fulfillment.	To make profits for serving society.
Types of organizations	The organization can be a company, partnership, or sole proprietorship firm.	The organizations that are of nonprofit types are clubs, trusts, society, etc.
People that manage	Business owners, sole proprietors, or partners.	Trustees, governing bodies, or committee members.
Revenue source	The revenue source of this type of organization is selling goods and services.	The revenue sources of this type of organization are donations, subscriptions, grants, etc.
Seed capital arranged by	In the case of this type of organization, seed capital is arranged by the business owners or founders of the company/proprietorship firms.	In the case of a nonprofit organization, seed capital is arranged by sourcing government grants, asking for donations, etc.
Financial statements/accounts prepared	For-profit organizations, the income statement, theA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more cash flow statementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read more, and the balance sheet are prepared.	The receipts & payments account, income & expenditure account, and balance sheet for a nonprofit organization are prepared.
Profit transferred to	Capital account.	Capital fund account.

Final Thoughts

Even if profit organizations keep the profit for their benefit, it serves many people through their products and services. And at the same time, even if nonprofit organizations are created to serve society, they may pay a salary to the trust’s chairman.

What is a nonprofit organization?

A nonprofit organization is one that qualifies for tax-exempt status by the IRS because its mission and purpose are to further a social cause and provide a public benefit. Nonprofit organizations include hospitals, universities, national charities and foundations.

[Read more: Education, Partnerships and Community Are Essential to Nonprofit Success]

To qualify as a nonprofit, your business must serve the public good in some way. Nonprofits do not distribute profit to anything other than furthering the advancement of the organization. As such, you will be required to make your financial and operating information public so that donors can see how their contributions are being used. An individual or business that makes a donation to a nonprofit is allowed to deduct their donation from their tax return. The nonprofit, likewise, pays no taxes on any money received through fundraising.

What is a not-for-profit organization?

Similar to a nonprofit, a not-for-profit organization (NFPO) is one that does not earn profit for its owners. All money earned through pursuing business activities or through donations goes right back into running the organization.

However, not-for-profits are not required to operate for the benefit of the public good. A not-for-profit can simply serve the goals of its members. A good example is a sports club; the purpose of the club is to exist for its members’ enjoyment. These organizations must apply for tax-exempt status from the IRS, including exemptions from sales tax and property taxes. That also means that money donated by an individual to an NFPO cannot be deducted on that person’s tax return.

Nonprofit vs not-for-profit organizations

There are four key differences between a nonprofit and a not-for-profit:

Nonprofits are formed explicitly to benefit the public good; not-for-profits exist to fulfill an owner’s organizational objectives.
Nonprofits can have a separate legal entity; not-for-profits cannot have a separate legal entity.
Nonprofits run like a business and try to earn a profit, which does not support any single member; not-for-profits are considered “recreational organizations” that do not operate with the business goal of earning revenue.
Nonprofits may have employees who are paid, but their paychecks do not come through fundraising; not-for-profits are run by volunteers.

Nonprofits are granted 501(c)(3) status by the IRS. NFPOs are also governed by IRS tax code section 501(c), but depending on their purpose they could fall under a different section, like section 501(c)(7).

What is a for-profit organization?

A for-profit organization is one that operates with the goal of making money. Most businesses are for-profits that serve their customers by selling a product or service. The business owner earns an income from the for-profit and may also pay shareholders and investors from the profits.

Whether you decided to start a for-profit, not-for-profit or nonprofit, the first steps to creating your entity are the same. Start by filing for a business entity in the state in which you wish to run your operations. Your business entity might be a corporation, LLC, sole proprietorship or partnership.

Once the entity has been formed, you will apply for an Employer Identification Number (EIN) with the IRS. It’s during this step that you will select your tax-exempt status using Form 1024 if you wish to run as a nonprofit.

Some businesses start as one type of legal entity and later decide to convert to another.

Can you change your legal entity?

Some businesses start as one type of legal entity and later decide to convert to another. This is possible, but it’s a little complicated depending on the types of entities involved.

From nonprofit to for-profit

There are a few reasons why you may wish to change from a nonprofit to a for-profit. Maybe you believe you can get better access loans or other funding by becoming a for-profit. Or maybe you prefer to operate without the regulations that govern nonprofits.

Regardless, once you’ve carefully considered this option and all shareholders are in agreement, you will need to notify the IRS by writing a "statement of nonprofit conversion." This statement will include:

The reason for nonprofit termination;
A certified copy of a liquidation plan;
The fair market value of the organization;
A list of all asset recipients if assets will be distributed.

You will also need to contact your state and local representatives to fill out any forms required in your specific jurisdiction.

From for-profit to nonprofit

Converting a for-profit to a nonprofit is a little more difficult, as the IRS wants to discourage businesses from making this move to avoid paying taxes. It can be done, however, through a process that isn’t so different from starting a nonprofit from scratch.

“While you may be able to retain the for-profit organization name for use by your nonprofit, a nonprofit organization requires you to use the money you raise to suit a purpose other than distribution to shareholders or business owners, and it needs to fulfill the mission and goals of the nonprofit,” explained Small Business Chronicle. “Transitioning to a nonprofit organization requires you to do some planning prior to registering the nonprofit with the state in which it operates.”

This transition includes writing a mission statement, establishing bylaws, and filing articles of incorporation with your Secretary of State, among other things. It’s at the articles of incorporation step that you will need to let the Secretary of State know you’re keeping the same name as your existing for-profit.

Which legal entity is the best?

Ultimately, the legal entity that’s right for your business depends on your goals. As one entrepreneur, Jane Chen, outlined in Harvard Business Review, there are pros and cons to each entity.

“A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected,” she wrote. “A nonprofit, on the other hand, can seek donations from individuals, foundations and corporations. Such stakeholders generally expect a ‘social return’ on capital.”

There’s no one-size-fits-all when it comes to establishing a legal entity for your business. And, the good news is you can always change your entity as your business grows. Speak to an expert who can help you choose an entity that optimizes your tax deductions while serving your overarching goal.

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Published April 20, 2021