For-profit and nonprofit organizations are both designed to promote public good. But there are many differences that separate the two entities. It’s important to know whether to select a for-profit or a nonprofit organization when starting a business.
A for-profit organization must raise capital from profits that are generated by the sales of their products and services. Additionally, they seek funds from lenders and private investors. A for-profit organization can obtain grants and donations from people, foundations and government agencies. This organization provides shares to shareholders who can become part owners.
Nonprofit organizations have numerous tax exemptions, which include sales and property taxes. Any income that is generated is never taxed by the federal government. However, if this organization has employees, the employees have to pay Social Security and Medicare taxes.
Most for-profit companies have to pay four or five types of taxes: income, employee, estimated, self-employed and excise taxes. Income tax is the most important type that is listed on a federal income tax return. Any tax that is not paid through the income ends up being estimated tax.
Self-employment tax is required only by self-employed individuals. Excise tax is required by individuals and companies that have special types of services like environmental or air transportation taxes.
Nonprofit organizations spend half of their time and effort in raising awareness for their cause. The other half of their time is spent on raising funds by writing grant letters, organizing fundraisers, hosting charity drives, etc. They have to develop their websites, send out mailings, perform basic office administration and promote marketing campaigns. They also focus on recruiting and keeping in contact with volunteers.
For-profit companies spend most of their time handling the financial transactions of their products and services. They invest more time and effort in managing their finances and handling the payroll for their employees. Instead of hosting fundraisers, they promote marketing campaigns to reach out to customers.
The terms for-profit and nonprofit should never be used interchangeably. For-profit companies focus mainly on making money and handling finances. Nonprofit organizations focus on spreading awareness about a social cause and raising money through friendly donations. There are numerous similarities and differences to know when deciding between a for-profit or a nonprofit group.