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Help Sheet

What is the difference between for-profit and not-for-profit groups?

The question of profits

On the surface, the difference between the for-profit and not-for-profit sectors is simple to ascertain: for-profits make money and not-for-profit organisations do not.

However, this explanation is misleading. Most not-for-profits also make money - after all, they also need to pay staff, rent offices, provide mail-outs or newsletters, pay phone and electricity bills, etc. In short, they need to cover their costs.

Not-for-profit organisations may also generate profits - i.e. make more money than they spend. The difference between for-profits and not-for-profits is in how those profits are handled. While for-profit organisations are free (within the bounds of the law) to keep the money they make, reinvest it in the business, or pass it out to shareholders, not-for-profit organisations may not distribute their surpluses to their members - profits must be held and/or invested back into the organisation.

The mission

Many people see the for-profit and not-for-profit sectors in clear-cut, value-based terms, with for-profit organisations being driven by the pursuit of money and not-for-profit organisations existing to contribute something to society or the community. This "community contribution" can take many forms, from fighting fires to art making, from lobbying for rights to putting on a show.

However, the distinction between the two sectors has blurred somewhat in the modern age of corporate social responsibility, as companies are subject to greater and greater demands to be more "community friendly". And at the same time as many businesses are becoming more socially responsible, many not-for-profit organisations are becoming more entrepreneurial, undertaking strategic planning and adopting other measures previously considered the exclusive domain of the business world.

That said, it's still true that not-for-profit and for-profit organisations are generally defined by their differing missions. A for-profit butter factory isn't really about making butter: if it looks as if there's more money in making cream, or cheese, or indeed plastic toys or biofuel or tourism, it can switch cheerfully to the new business - it's about making money. A not-for-profit homeless shelter is about providing a homeless shelter.

Some for-profits see "doing good" as a means to an end (i.e. increasing the profits of the business), but not-for-profit organisations see "doing good" as an end in itself. They exist to fulfill their mission, whether that mission is to fight fires, make art, change social structures, or put on a play that packs them in the aisles.

Who are the "owners"?

While business ownership is generally clear-cut, ownership of not-for-profit organisations can at times be confusing.

While a person or persons may pay to set up a community group, and may even fund its operations, they do not, in the strictest sense, "own" the organisation, as they can't benefit financially from the group.

The group, if it's incorporated, is a legal entity unto itself. It can sue or be sued, enter into contracts, hire staff, receive donations, etc. Profits can't be given to those who paid to set up the group, but must be held for use by the group. The committee of management or board has to act in the best interests of the organisation, not the individual members.

It's more useful, then, to see ownership of a not-for-profit group as being vested in its stakeholders - the people or groups that have an interest in, or may be affected by, a particular decision or action. A community group's stakeholders can include its "consumers" (i.e. those using or benefiting from the services provided), the members of the group, its donors, its sponsors, its staff members, governments, and society at large (which funds the tax breaks provided for not-for-profit organisations and expects certain things in return).

In the eyes of the law

In some circumstances for-profit and not-for-profit organisations are viewed differently in the eyes of the law. Under the Tax Act, for example, most not-for-profit organisations receive tax breaks in some form or another, although what sort of tax break depends on the type of organisation and its function.

In return for the financial advantage provided by tax concessions, though, there's an implied expectation by society that not-for-profit organisations will act responsibly, remain true to their missions, and in so doing make a contribution to society.

Correspondingly, the law won't cut not-for-profits much slack if they step out of line. When it comes to the responsibilities of the board, for example, the law doesn't treat not-for-profit organisations any differently from their for-profit cousins.

Pressures

Many of the pressures and challenges experienced by businesses in the for-profit sector are equally applicable in the not-for-profit arena.

For example, like their business cousins, most not-for-profit organisations have to face stiff competition - but rather than competing for product sales, they're competing for funds, members, sponsors, media exposure and supporters.

However, some pressures - time and money, in particular - are more pronounced in the not-for-profit sector, if only because many not-for-profit workers are unpaid volunteers trying to squeeze their service in among the demands placed on them by paid employment and social and family commitments

The challenge of operating within a climate of scarce resources takes not-for-profit organisations into different and highly challenging arenas as they develop methods for raising funds and keeping their organisation in good financial shape. Securing sponsorships, bidding for grants and fundraising (like selling t-shirts & badges or putting on an art exhibition) can be all in a day's work for not-for-profit community groups.

And while businesses may be subject to strict financial reporting rules, that's nothing to the standard reporting requirements for not-for-profit organisations - not only must they report to the usual government bodies on their financial health, they have others demanding financial reports too, because they're generally using other people's money. Funders often place strict conditions on how their money is used and usually demand rigorous reporting of how it's been spent.

With ever-increasing competition for a piece of the funding pie, not-for-profit organisations are also increasingly facing pressure to diversify their revenue base and to become self-sustaining through such means as investments and social enterprises.

At the same time, because they are expected to be working only for the good of society not-for-profit organisations can also face harsh criticism when they do venture into the money-making arena. Something as simple as charging admission to a seminar can provoke a damaging rebuke.

Despite attempts to become more self-sustaining, most not-for-profit groups remain heavily reliant on fundraising. The demands of fulfilling funders' expectations, particularly if they diverge with those of the board, the staff, the consumers and other stakeholders, creates more pressure.

Those whose experience is rooted in the corporate world may also be surprised at the different pace of the not-for-profit sector. While bigger groups may have managers in place, decisions in many smaller groups often have to wait until the next board meeting or AGM.

Most not-for-profit groups have access to the benefits of unpaid labour deriving from the use of volunteers. While this can be a boon for cash-strapped groups, volunteers also bring challenges - they have to be recruited, trained and monitored, they often have to be insured, and they usually expect something in return for their service, even if it's just a thankyou.

Paid staff can also operate differently in a not-for-profit setting. Many people opt to work for not-for-profits because they're attracted by the idea of working to benefit society, and they may see forgoing a fat pay packet as a good swap for the satisfaction they can derive from working for a cause. While this doesn't mean that not-for-profit employees should be poorly paid, it's useful to note that their motivations and view of rewards may differ from those in other sectors.

Of course, on the flip side, many not-for-profit employees do see their position as just another job, and almost all employees will, at some time or other, feel frustrated at having to work within a sector often characterised by shortages.

These practical matters, though, shouldn't be allowed to obscure the basic legal difference between for-profits and not-for-profits. The difference isn't in making a profit - it's what you do with it afterwards that counts. A for-profit can give money to its shareholders: a not-for-profit can't.

 

 

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