Every business must have a purpose. In a for-profit business—as the name suggests—the primary purpose is making money. Nonprofit businesses, on the other hand, exist to serve the interests of a group of people. Their continued work is not supported by paying customers but by grants and donations from those who recognize the importance of their work.
The term “nonprofit” refers to an organization’s tax designation, not its ability (or inability) to generate revenue. Nonprofit does not mean that a business is losing money or operating “in the red.” In fact, many successful nonprofits bring in more money than they spend. The primary difference is that the principals of nonprofit businesses cannot receive distributions from the profit generated. Rather, these funds must be used to sustain organization’s activities.
When deciding whether to structure your business as a for-profit or a nonprofit, you should carefully consider whether or not you want to personally profit from the venture. In the for-profit world, the “sky’s the limit” on your earning potential. As a for-profit entrepreneur, the more money your business makes, the more you make. This is not true in the nonprofit world where profits must be directed back into the business. You can draw a salary for the work you perform for a nonprofit business, but there are limitations on your level of compensation.
Another key consideration is the degree of control that you hope to have over the business. In the profit-making world, the larger your share of ownership in the business, the more control you have over its activities. Ownership guarantees you a seat at the decision-making table (and a continued share of the profits). In a nonprofit business, there is no such thing as ownership—no matter how much of your own time and money you have invested. As a nonprofit entrepreneur, you will be an employee and the organization’s board of directors will be your boss. As the board evolves they may have very different ideas than you about the direction of the organization and perhaps even your role in the organization.
One important fact to keep in mind is that nonprofit does not mean non-business. Nonprofit businesses should be just as professional and accountable as their profit-making counterparts. This means preparing a comprehensive business plan, creating a bookkeeping system, following standard accounting practices, creating a professional image, and providing top-notch customer service.