The distinctions between for-profit and nonprofit businesses may seem self-evident, but when it comes to payroll, taxes, funding, leadership structure, and human capital management, it’s essential to understand the key differences (and legal requirements) for each type of organization. Nonprofit organizations should develop a deep understanding of their tax liabilities, donation & revenue sources, organizational culture and potential tax breaks. In this article, we’ll explore the major differences between for-profit organizations and nonprofits, including how to navigate payroll, tax, and workforce management considerations to maximize tax benefits and strengthen your organization.
What is a For-Profit Organization?
For-profit organizations typically sell a service or product to their customers/clients with the goal of generating revenue for personal profit. In this type of organization, an employer earns income from the business enterprise and in some cases also pays investors, shareholders, employees, and contractors from the business’ profits.
Any for-profit organization must file for status as a business entity in the state or states where it operates, whether it’s classified as a sole proprietorship, partnership, LLC, or corporation. This registration process includes applying to the IRS for an Employer Identification Number (EIN), which can now be completed online.
What is a Nonprofit Organization?
A nonprofit organization is primarily focused on offering a service that is of public benefit and supports a larger social mission. Nonprofits can include foundations, charities, land banks, hospitals, universities, as well as churches and religious organizations. Any profit made from operating a nonprofit must be reinvested into advancing the organization, which is why nonprofits are uniquely required to provide public access to their financial and operating records – keeping donors informed about how their contributions are being allocated.
Unlike for-profit organizations, nonprofit organizations are eligible for tax-exempt status. A nonprofit can file for tax-exempt status using Form 1024 when applying for an EIN as a nonprofit. Most often, nonprofits are granted 501(c)(3) or 501(a) status by the IRS, but some social welfare organizations are given 501(c)(4) status.
Although nonprofits are not required to pay federal income taxes or taxes on money received from fundraising, they do have a number of tax liabilities and compliance requirements specific to their organization type.
Nonprofits are still required to make payroll tax and FICA contributions (Social Security and Medicare). Additionally, they may be liable to pay taxes on any unrelated business income, as well as a number of local or state taxes depending on the nonprofit’s jurisdiction and organizational classification.
Additionally, unlike for-profit businesses, nonprofits must provide the IRS with a detailed summary of all business activities, usually including total assets, gross receipts, and a completed Form 990 (or a permutation of Form 990, depending on a nonprofit’s organizational classification).
For these and other reasons, many nonprofits work with a qualified payroll and HCM provider to ensure accurate payroll processing, long-term compliance, and the fulfillment of all tax liabilities.
Differences Between For-Profit and Nonprofit Organizations
Aside from pronounced differences in mission and tax obligations, nonprofit and for-profit organizations operate differently with respect to funding, leadership structure, and in how they manage company culture and connect with their intended audiences.
In a for-profit organization, new projects and overall business growth is funded by profit created from the sale of services or products. For-profits can also pool funding from investors, loans, or from capital provided by the business’ owner(s), founders, or partners. Midsized businesses and large businesses may even attract funding from national, international, or venture capitalist investors.
While a nonprofit may also be a large organization and attract support domestically and internationally, they must receive their funding by fundraising, crowdfunding, or through the donation of capital, products, time, or materials by private or corporate parties. Of course, many nonprofits also acquire funding by applying for or receiving local, state, or federal government grants.
Although nonprofits often rely on volunteers as part of their workforce, many also have paid employees on staff. Since any employee of a nonprofit organization must be paid from the gross revenue of the organization (and not through any fundraising dollars), nonprofits are incentivized – like for-profit organizations – to earn greater profits each year, especially since profits can be reinvested to increase the scale of paid staff, fund new projects, or provide other social and organizational benefits.
Leadership Structure & Management
Executive leadership within a for-profit company is typically composed of individuals with a vested interest in the financial success of the business. Depending on the size of a for-profit business, executive leadership could include one or two individuals, or a sizable corporate board, as well as other stakeholders like private investors. Fundamentally, these leaders are concerned with the financial growth of the organization.
Nonprofit executive leadership usually includes a board of anywhere from 10-100 members who are primarily concerned with the social impact and efficacy of the nonprofit organization. Although none of these individuals has financial ownership of the organization, they may also discuss and attempt to resolve financial and practical concerns, whether it’s formulating new fundraising strategies or brainstorming ways to attract donations or grant funding for an important community project.
Similarities Between Nonprofits and For-Profit Businesses
Despite some obvious distinctions, nonprofit and for-profit organizations are increasingly incorporating or “borrowing” practices from each other to strengthen their organizations, especially when it comes to improving company culture and community connection while catalyzing financial growth.
For-Profit Practices Applied to Nonprofit Organizations
Like for-profit businesses, nonprofits benefit from being profitable. Although they are mission-focused, many nonprofits aspire to grow financially on a yearly basis to fund new projects or expand their social influence and impact on the communities they serve. Instead of marketing to audiences to increase sales of a product or service, they may instead focus on improving fundraising efforts to reinvest any profit into a meaningful project for a local community or to expand their team to include more paid staff. As projects succeed in their community, they stand to attract more corporate and private funding, or to increase profits to hire grant writers who could attract further government funding to advance the nonprofit’s overall mission.
Nonprofit Practices Applied to For-Profit Businesses
To more deeply connect with their audience(s), improve company reputation, and create more meaningful experiences for their workforce, more for-profit organizations have adopted aspects of a nonprofit mindset to apply to their business practices. This could manifest as hosting charity events, volunteering in the local community, improving employee benefits & perks, or taking other concrete steps to demonstrate an investment in the well-being of their community and workforce, as well as larger social issues.
Whether a for-profit organization seeks to capitalize on profits to improve employee benefits or a nonprofit seeks to expand its workforce and social impact, this process is streamlined and expedited with the support of a qualified payroll and HCM provider. In each case, expert support and leading-edge technology can be used to help an organization focus on its core goals and alleviate tedious or redundant tasks for HR staff and other employees.
Optimize HCM Management & Payroll for Your Organization
CAVU HCM offers a comprehensive solution to simplify payroll taxes and HCM for nonprofits and for-profit organizations. We offer specialized client support to address the specific needs of your organization based on organization type, jurisdiction, compliance requirements, and your goals for organizational growth.
Ready to optimize business operations and maximize your human capital? Schedule a personalized demo today to see how our comprehensive HR and workforce management solution can help your organization thrive.