Many entrepreneurs struggle to define whether their business idea should be classified as a for-profit or nonprofit. While there are fundamental differences between the two, there are many similarities. Today, the adage that nonprofit CEOs earn little compared to those in the business sector is no longer valid.
Data from the Economic Research Institute shows that nonprofit leadership salaries average over $148,000, with high-earners earning tens of millions of dollars. In addition, nonprofits are increasingly run like businesses, focusing on developing sound operating and strategic plans, having stable financials, and a growth mindset. This article outlines the key differences between the two classifications and the associated expenses you’ll need to consider.
What makes the nonprofit classification unique?
Unlike an independent business, no individual or group is the sole “owner” of a nonprofit organization. All major decisions such as allocating funds for staff or purchasing new technology are made by a board of directors. Nonprofits can range from multi-billion-dollar international organizations to small groups that address specific community concerns. Unlike the franchise restaurant model, where every location is nearly identical, each nonprofit is unique because they are designed to benefit the individual needs of the region or demographic they serve.
What makes the business classification unique?
Large or small, publicly traded or independently owned, the goal of a for-profit business is to make money. A business owner’s income is based on the profits earned after expenses are paid. Therefore, fewer expenses and more profit can translate into larger salaries and bonuses.
For entrepreneurs wanting to combine a for-profit business model with a purpose-driven mission, becoming a Certified B Corporation is an expense worth evaluating. B Corps must document their environmental impact, worker and customer wellbeing, and community involvement into their business plans.
Incorporation and Tax-Exempt Status
Regardless of which classification you choose, every entrepreneur needs to file paperwork with the IRS for a federal tax identification number and within the state (or states) they operate in to become a recognized entity.
In addition to federal and state approvals, nonprofit organizations also need to submit paperwork to receive tax-exempt status, which allows them to receive charitable donations. This is an additional expense that must be considered. Fees for obtaining tax-exempt classification vary, so consulting with a lawyer, accountant, or nonprofit consulting agency is necessary for understanding the specific requirements in your region.
Differences in Accounting Practices for Expenses
Both for-profit and nonprofits will have operating costs for expenses such as rent, salaries, utilities, and equipment. A nonprofit may also have additional program-focused expenses such as hosting fundraising events and paying for grant writers to help maintain their income stream.
Instead of issuing quarterly bonuses to employees or stockholders, nonprofits are required to re-invest surplus funds to advance their mission and enrich the community they serve. Regardless, both classifications must continually seek to reduce risk and maintain their relevance to the market or demographic they serve.
When it comes to tax season, for-profit businesses must produce balance sheets and income statements. Conversely, nonprofits are required to submit IRS Form 990 or 990-N, which provides the federal government, donors, and grantors with an overview of how the organization operates. The required form is income-dependent, so make sure to conduct some research or connect with a tax advisor in advance.
Private Business or Nonprofit? Which is Best?
Whether you launch a for-profit or nonprofit enterprise, both options will require time, energy, and close attention to expenses to be successful. Evaluating your strategic plan and objectives and consulting with a trusted advisor will help you determine which classification is best for your endeavor.