The Difference Between Nonprofits, and For Profit Companies
If you are thinking about starting a nonprofit organization, you may think that it’s just like a private business, only for a charitable purpose. But there are a lot of differences between for profit companies and nonprofit companies, and even differences amongst the kinds of nonprofit companies themselves.
Making Money is OK
To dispel a common myth, nonprofits are allowed to make money, charge for certain services, and pay for business expenses. What a nonprofit organization can’t do is take the profits and give them to the shareholders or owners in the form of dividends, the way that a for profit company would do.
Additionally, while a nonprofit can certainly save money for emergencies, a nonprofit is not supposed to hoard money, or stash it away to amass wealth. Rather, the money that a nonprofit makes should go towards operating expenses.
And yes—those operating expenses can include salaries, even generous salaries, so long as the salaries are reasonable. Many large nonprofits have officers making significant incomes.
The only requirement is that salaries are reasonable as compared to the company’s overall budget. That’s a limitation that doesn’t apply to private companies—a private company can bankrupt itself paying exorbitant salaries if it wants to, whereas a nonprofit doing the same thing wouldn’t just find itself bankrupt but the officers who took the salary could find themselves in individual legal trouble.
A nonprofit can even own stock or securities, so long as the money made of the securities is put into the business to operate it—not given to shareholders as dividends, the way it would in a profit company.
Differences Between Nonprofit and Not for Profit Organizations
So far, we’ve discussed nonprofit organizations. In everyday language, “nonprofit” and “not for profit” are used interchangeably, but they actually have different legal meanings.
Nonprofit organizations are limited to organizations where the business mission is related to education, science, religion, literature, amateur sports, public safety, or the prevention of child or animal cruelty. These kinds of companies are called “tax exempt,” because they get huge tax breaks, and donors get tax write offs for donating to them. They are often also called “501(c)3” organizations, a reference to the IRS tax code that deals with their tax exempt status.
As you can see, nonprofits benefit society or the country as a whole. But not for profits have a benefit only to the members. For example, imagine starting your own city wide banjo appreciation group. Or a weekly meeting of poetry lovers. Or a seafood lovers club that goes to restaurants and eats seafood.
Certainly, these aren’t for profit companies, and they aren’t seeking to make money—just to appreciate something in life they want to appreciate. These are not for profit companies, and while they do get some tax benefits they don’t enjoy the same benefits as true nonprofit organizations do.
We can help you with your corporate legal issues, and in the forming of your business. Call the West Palm Beach business litigation lawyers at Pike & Lustig for help today.