Nonprofits vs For-Profit Businesses: Key Differences and Similarities
When people think about “making change” in the world, most people jump to the idea of starting or leading a nonprofit organization.
But there is actually a wide range of tax vehicles and statuses that people use to accomplish their social change goals—including nonprofit organizations and different types of for-profit businesses.
So, as a nonprofit nerd, I decided to delve into the ways that nonprofit organizations and for-profit businesses are both different and similar.
You might be surprised at some!
10 Ways Nonprofits Are Different from For-Profit Businesses
Driving Motivation: Unlike for-profit businesses, nonprofit organizations are motivated by mission, not money. Nonprofits are driven by impact, not profit.
Different Approaches to Revenue: Nonprofits may limit their revenue generation to what is needed to achieve goals. That's it. For-profit businesses don't have that focus or constraint. Success can mean unending profit. A business owner may decide they don't want to get bigger, but that is in the minority of the business community.
The Halo Effect: There is a halo effect surrounding nonprofits. We are widely seen as moral, ethical, nice, community-focused entities doing good work. Although many business people have halo effects, most people do not see businesses and companies as a place that is particularly ethical or moral. They may be seen as ethically neutral or in some cases, motivated by "making a sale" and therefore suspect at times.
Donations and Discounts: Vast numbers of people, businesses, and corporations will give things to nonprofits for free or reduced fees because they have this halo effect; even though they don't have to pay taxes, nonprofits still get things cheaper or free. It's marvelous.
No Equity for Nonprofit Staff: One reason people decide to work for certain companies is the promise that the company will reward its workers with ownership shares. Employees of companies have rules on what and when they can "buy in" and when those stocks/shares vest or mature, but they are a huge form of compensation. Nonprofits just don't have this!
No Returns (Mostly): Unlike for-profit businesses, nonprofits don't have a return policy/desk/counter/aisle. We don't have to worry about people wanting refunds (though we do have to worry about donation renewals). It is very rare that a donor asks for their money back if they didn't see an outcome they desired or didn't attend a gala.
Fewer Bonuses in Nonprofits: It is very rare to give bonuses in nonprofits, although some do. Usually, in nonprofits, bonuses are saved for c-suite leaders like the Executive Director or a development director who hit a major goal (capital campaign success or doubling organizational revenue). Bonuses tend to be episodic and not annual. However, this is changing!
Cost of Doing Business: It is less common to hear nonprofit staff discuss "the cost of doing business." This expression just assumes that you will pay more to make more. Businesses have higher legal bills, trademark and copyright considerations, intellectual property disputes, international relationships, travel costs, and other expenses in pursuit of profit. Large nonprofits may use this framing at times but it’s generally frowned upon to make expenditures that you know aren't directly tied to your mission. Most stakeholders expect nonprofits to find the cheapest way to do things instead of spending money on fancy meals with donors or business class tickets on a plane.
ROI: Nonprofits do not typically discuss "Return on Investment." We may hear some nonprofits use this term when deciding to purchase technology or whether an expenditure for a fundraising effort bore fruit. But overall nonprofits are more likely to use language that references winning, making a bet that paid off, or focusing on a strategy. The idea that an outlay of money needs to pay for itself is rare but may be used in very large nonprofits that have a more business mindset internally.
Relying on Trust: Businesses are far more likely to work through contracts instead of relying on trusting each other’s good intentions. This extends to employment contracts. I am a huge believer that we must protect all workers with contracts (I am pro-union). But at a minimum, our nonprofit leaders need the security that private sector executives do.
10 Ways Nonprofits and For-Profit Businesses Are Similar
Need for Revenue: Both nonprofits and for-profit businesses need revenue to accomplish their goals. They must focus on tactics that bring in revenue to meet their goals. Many are looking for funding by finding investors or donors.
Overhead: Like for-profit businesses, nonprofits have overhead and administrative costs associated with technology, payroll, rent, and other regular expenses.
Legal Registrations: All for-profit businesses and nonprofits should have an EIN and be registered in a state or territory.
Accounting: For-profit businesses and nonprofits both have similar banking and bookkeeping needs (though there are some differences in nonprofit accounting). Both should have business checking accounts and usually lines of credit, debit cards, and bookkeeping standards to avoid audits or compliance problems.
Budgets Matter: Both nonprofits and for-profits create budgets and then try to stay within those budgets using a variety of tools and disciplines.
Boards of Directors: Businesses and nonprofits must adhere to the Duty of Care, the Duty of Loyalty, and the Duty of Obedience. These duties are especially critical for nonprofit boards of directors.
Compliance with Local, State, and Federal Regulations: Nonprofits and for-profit businesses are regulated by the Attorney General of their respective states and possibly other entities at the state, municipal, and federal levels.
Board Authority: Many for-profit businesses also have boards, like nonprofits, that have some authority over the CEO or Executive Director.
Tax Accountability: Both nonprofits and for-profits have some accountability to tax authorities and, other than churches, may have to file annual reports to stay compliant.
Staff Retention: Nonprofits and for-profit businesses rely on similar management practices to engage workers, like job descriptions, performance improvement plans, regular check-ins, incentives, benefits packages, and annual cost of living wage increases
Learn More About Nonprofit Leadership
If you’re interested in creating, working for, or leading a nonprofit, then you’ve come to the right place. Check out the nitty-gritty of what nonprofit leaders do and then check out all the free resources we offer on nonprofit fundraising, leadership, and board development.
