6 Differences Between For-Profit and Nonprofit Organizations

6 Differences Between For-Profit and Nonprofit Organizations

Have you ever wondered what exactly is the difference between for-profit and nonprofit organizations? As suggested by their names, it is easy to understand that the main difference is connected with the profits of these organizations. However, it has nothing to do with whether they make profit or not, but rather with the following: 

Purpose

All organizations have a purpose, but one of the biggest differences profit versus nonprofit organizations have lies in the fact that for-profit organizations’ primary mission is to generate profits for personal fulfillment. They do this by creating and selling products and/or services. 

On the other hand, the main goal of a nonprofit organization is to make profits for serving society. They promote a social cause by offering assistance with basic human needs. Nonprofits aim to tackle challenges and solve important issues such as alleviating poverty, providing education, food and water, assisting with housing, protecting endangered species and/or the environment, etc.  

Funding

Providing funds is the basis of all successful operations and projects. The seed capital of for-profit organizations is provided by the founders or business owners, by bank loans, investors and revenues generated from sales of their products and services.

Nonprofit organizations use a different approach. They seek both private and corporate donations of time, material, products, and money. Government grants are also used for funding the operations of nonprofits, together with crowdfunding. 

Funding

Target Audience

When looking at for-profit vs. nonprofit organizations, the diversity of the audience is another key difference. While for-profit businesses have a more precisely defined target audience, that is usually not the case with nonprofits. While for-profit organizations try to establish a relationship with clients who buy their products and services in order to generate revenue, the nonprofit ones seek to reach a more diverse audience including volunteers, corporate sponsors, donors, and the general public. Therefore, nonprofits need to take into account the different interests of each segment of their audience.

Management

A for-profit organization can be a privately held business or a large corporation with boards and stakeholders. Responsibilities are distributed among individuals or a group that takes part in the financial success of the business. Since for-profits are primarily focused on increasing revenue, not only do these for-profit leaders share responsibilities, but they often share financial incentives.

Nonprofits, on the other hand, are mostly led by trustees, a board of directors or committee members that do not have direct financial ownership. Their main concern is not about financial success, but about social and/or environmental issues. 

Organizational Culture

For-profit vs nonprofit organizations differentiate in their organizational cultures. Since for-profits tend to focus on the financial gain, they value employees who contribute to the creation of new products and services, as this can help increase revenue. 

Nonprofit organizations, on the other hand, are community-oriented. Their employees are often seen supporting the cause outside their regular schedule attending events or handing out informative and educational resources to local businesses in the evenings or on weekends.

Taxation 

Since for-profit companies make profits for their own benefits, they have to pay taxes as required by the law. However, nonprofit organizations are exempted from paying taxes as they make profits to help society. In addition, individuals and businesses that donate to nonprofits can claim tax deductions.

If an organization is a nonprofitable entity, that does not mean it cannot be profitable. Just like for-profit organizations, the nonprofit ones very often have the same approach to generating revenues and increasing profits with the aim of creating more programs or improving the existing one(s). However, the difference between a for-profit and nonprofit organization is that the latter is required to reinvest any profit in pursuit of its purpose.