I often encounter clients that want to create a non-profit business. They all too often think that the primary difference is just one pays taxes and the other does not. They think that as long as they have a social benefit, they can be considered a non-profit. However, there is a vast difference between their perception of what it takes to run a non-profit and reality. The following are some of the key differences between the two entities.
A key to building a strong non-profit is creating a powerful board of directors. Board members are the non-profit’s salespeople and are often a primary source for funding their mission. In contrast, most for-profits don’t have a formal board. If they do, they have a much smaller role and primarily focus on establishing a strategic direction. While a typical non-profit board has perhaps 15 people, a typical for-profit may have a board of just five, if they even have one. The board of directors in a non-profit chooses the Executive Director (ED). The founder may handpick the first set of board members who feel he is the most qualified to be the ED. However, as the board rotates members, the founder ED is often replaced by the board.
In a for-profit, the founder is generally the one person whose job is secure. As long as the business continues to make money and their ownership hasn’t been diluted by other investors or sold, the founder remains with the company.
When it comes to hiring talent, non-profits are generally able to pay less because the employees are more mission-oriented than salary oriented. In a for-profit, especially if it is a startup, you have to provide some incentive to the employees to compensate for the risk. As a result, it often costs you more to attract higher caliber employees in a for-profit business than a non-profit. Non-profits that are successful have no end and hopefully live on forever. Entrepreneurs of successful for-profits often have an exit strategy so they can cash out or pass on the business to a family member. For example, they can plan on selling the business in the future to cash out.
Non-profits always employ a multi-sided marketing model in that the donors who give the business money are not the consumers of the products or services of the business. For-profits generally sell a product or service to the ultimate consumer which make marketing easier in most cases. Non-profits are required to adhere to copious amounts of regulations to maintain their non-profit tax status. Non-public for-profits businesses, on the other hand, have fewer regulations they have to deal with and are easy to keep in compliance. While a non-profit is required to submit audited financials to maintain their tax status, for-profit companies can get by with compiled financials.
Non-profit and for-profit businesses are quite different from one another. Are you aware of all differences?
