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7 Key Differences Between Nonprofit and For-profit Organizations
Reproduced from https://online.norwich.edu/academic-programs/resources/7-key-differences-between-nonprofit-and-profit-organizations by Norwich University Online on December 1st, 2016.
When joining a new organization, understanding its structure, needs and goals can be tremendously beneficial for short- and long-term success. Two of the major organizational structures, nonprofits and for-profits, have different missions, target audiences, and problem-solving strategies. Students with a Master of Public Administration degree may find opportunities for roles within either organizational structure, so it’s important to recognize the key differences between the two.
1. Purpose
All companies have a distinct purpose, but this is where the difference between a nonprofit and a for-profit is the starkest. While for-profit organizations may have a variety of goals, their primary mission is to generate profit and develop effective products and services that are valuable to consumers. Companies develop products and services that either directly solve a problem or increase overall efficiencies, such as the case with mobile phones or autonomous vehicles. A nonprofit, by contrast, doesn’t prioritize profits and is instead dedicated to promoting a social cause or advocating for a particular standpoint. Examples of nonprofit services often include assisting with basic human and environmental needs such as food, water, education, endangered species, forests and wildlife. These services strive to solve important, potentially life-threatening problems and issues. Therefore, success for nonprofits is measured based on an organization accomplishing its philanthropic mission.
2. Funding
One of the most important aspects of running an organization is establishing a consistent method for funding projects and operations. For-profit organizations tend to fund their initial efforts through bank loans, local investors and revenue generated from sales. If a company’s product or service is considered to have a high potential market value, then they may have the opportunity to receive funding from national or global investors, such as angle investors and venture capitalists. Nonprofits often take a different approach by seeking out private donations of time and money, corporate sponsorships, and government grants, among others. Crowdfunding, a form of online fundraising, has also become a popular method of funding for nonprofit organizations as of late.
3. Diversity of Audience
For-profit companies can have a much more defined target audience than that of a nonprofit. In a for-profit, the company seeks to reach and establish a relationship with consumers who will purchase their products/services to help generate revenue. This relationship creates a continual feedback loop, allowing the company to increase its revenue and expand its offerings to reach new target audiences. Rather than delivering a product or service directly, nonprofits are typically approaching their audiences with a message about a product, service or action. Nonprofits must reach a more diverse audience which can include volunteers, donors, corporate sponsors, and the general public. Due to this broad audience, nonprofits must carefully consider the interests of each segment of their audience.
4. Leadership
The executive leadership of a for-profit company is typically quite clear. Whether it’s a privately held small-business or a large corporation with boards and stakeholders, leadership responsibilities are distributed amongst a select group of individuals. These individuals are considered not only leaders, but also have a stake in the financial success of the organization, which often results in incentives such as bonuses and profit sharing. Due to this, for-profit leaders are primarily concerned with profit and increasing revenue for the organization. By contrast, nonprofit organizations tend to be led and directed by a board of directors who guide the future of the organization without possessing direct financial ownership. The board can be anywhere from 25-30 members to upwards of 100 members. While not concerned as much with financial success, the leadership does have to balance financial concerns alongside social and/or environmental issues. In this case, leadership meeting agendas tend to include a wide array of topics such as funding for upcoming projects, social climate, environmental concerns, organizational performance, fundraising, social and political policies, and potential community concerns that need assistance or funding.
5. Organizational Culture
The differences in a mission can lead for-profit and nonprofit organizations to establish two distinctly different organizational cultures. Due to the goal of financial gain, the culture within for-profit organizations tends to focus on finances and business metrics, such as key performance indicators (KPIs). Employees are also encouraged to be innovative with the creation of new products and markets, all of which can help increase short- and long-term revenue for the company. The culture within a nonprofit is often more community-oriented, as employees are often asked to address and solve problems that have little financial incentive (ex. advocating against deforestation). With this community-oriented culture, it’s common to see employees of non-profit organizations advocating for the organization outside their work schedule. This could be attending an evening fundraising event or handing out educational resources to local businesses on the weekend.
Taxation
Typically, nonprofits are registered as a 501(c)3 organization, which means that they are able to provide their services as a public good without rendering a portion of their earnings back to the government. Likewise, individuals and companies donating to these organizations are able to write off their contributions as tax-deductible. For-profit companies are not able to benefit from tax exemptions and must pay taxes as the law requires.
7. Staff
The workforce of a nonprofit can be wholly different than that of a for-profit corporation. While a for-profit corporation will consist mostly of paid employees and interns, a nonprofit typically relies heavily on volunteer staff. This element links up with many other aspects of a nonprofit company, as these volunteers will also frequently be on the front line representing the nonprofit organization’s mission to potential future donors.
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