Fundamentally speaking, it might seem like nonprofit and for-profit businesses have nothing in common. After all, the main goal of a for-profit entity is to maximize profits for owners and shareholders, while a nonprofit focuses on serving the needs of communities.
But while their core missions undoubtedly differ, these organizations are not entirely at odds with one another. In fact, every nonprofit gets its start the same way as a for-profit does: By registering first as a corporation through the Secretary of State’s office. And there’s no denying that each entity takes an incredible amount of time, hard work, and dedication to get the business off the ground.
Another thing they have in common? Both nonprofit and for-profit businesses require strict attention to detail when it comes to bookkeeping, accounting, and tax services to keep things running smoothly.
With that being said, there are certain rules and processes that apply to each type of organization when it comes to ownership, accounting, financial reporting, and tax filing. It’s important to be aware of these differences and how they can affect financial planning.
Nonprofit vs. For-Profit Businesses
First thing’s first: How ownership factors in.
Steve Jobs. Bill Gates. Jeff Bezos. We know them as the faces, founders, owners, and CEOs of notable for-profit companies. Because they own shares or percentages of their companies, otherwise known as equity, they stand to benefit through dividends or disbursements of profits when the company performs well in the marketplace.
On the other hand, nonprofits do not have owners. Yes, you read that correctly — one person cannot own a nonprofit business. The organization can have a founder, but the day-to-day operations are governed by a board of directors and its staff as a public trust. This, in part, ensures the public that funds are being appropriately allocated and not mishandled by a single leader.
This leads us to nonprofit vs. for-profit accounting.
The ownership designation mentioned above means that there are different rules for nonprofits and for-profit businesses when it comes to accounting. For example, for-profit companies keep track of expenses and revenue as it relates to the sales of goods or services within a chart of accounts.
Since nonprofits don’t sell goods or services for a profit, their revenue can’t be tracked in the same way. Instead in nonprofit accounting, their revenue typically consists of grants, donations, membership dues, and fundraising events. Revenue that comes from grants and donations often has restrictions or rules on how the money can be used. That’s why nonprofit bookkeeping involves an accounting system that tracks revenue and expenses from a single point of origin.
Guess what? That means financial reporting is different, too.
Considering that accounting systems differ between nonprofits and for-profit companies, it stands to reason that their financial reporting differs as well. For-profit businesses generally put together an income statement every quarter that summarizes the company’s financial performance. They also track net income and tend to keep a balance sheet of assets that reflects retained earnings.
Instead of an income statement, nonprofits provide a statement of activities to the public that includes revenue, expenses, and net assets. They may also provide a statement of financial position, which outlines the organization’s assets and liabilities.
Both businesses have to file taxes.
Finally, the most notable difference between for-profits and nonprofits comes down to taxes. For-profit businesses are required by law to pay taxes based on their net income, while nonprofits are not.
Nonprofits must obtain a tax exemption through the IRS, and upon approval of their application, the business becomes a tax-exempt nonprofit with 501(c)(3) status. However, they are still required to file corporate tax returns every year to prove to the IRS that their revenues are being used appropriately. While nonprofits are exempt from paying income tax, they are still responsible for paying state and property taxes.