Do you know the difference between a business and nonprofit?

Last month, I talked about financial coaching and mentioned one of my favorite non-profits, Freedom Five One. That got me thinking. A lot of people who start businesses do so out of a desire to meet and serve others’ needs. They don’t necessarily go into business to make money. For many people in that situation, they wonder if they should organize as a non-profit rather than a for-profit organization. So this month, I’m going to talk about some unique characteristics of non-profits so that I can help you answer that question. 

For starters, the term “non-profit” comes from, of all places, the United States Internal Revenue Code! Yes, the very thing non-profits don’t have to worry about (taxes) is the very reason they exist. According to “A History of the Tax-Exempt Sector: An SOI Perspective”, the earliest mention of a tax-exempt organization was in 1894. Early Americans “formed charitable and other “voluntary” associations, such as hospitals, fire departments, and orphanages, to confront a wide variety of issues and ills of the era.” This predates even the regular income tax code that was enacted after the ratification of the 16th amendment in 1913. In fact, in the tax code a non-profit organization is referred to as a “tax-exempt organization”. 

How Non-Profits Differ from For-Profits

Generally speaking, non-profits are formed when the organizers don’t want to, or feel they shouldn’t, charge people for the services they are offering. They believe these services should be free, or very low cost. Rather than selling their services, a lot of non-profits apply for grants from foundations or the government and use that money to run their operations. Many non-profits also do a lot of fundraising. From a fancy charitable gala to an annual 5K, we are all familiar with these types of events designed to raise money for non-profits and further their respective missions. 

How Non-Profits are the Same as For-Profits

A lot of people mistakenly think that a “non-profit” organization cannot make a profit or that they are prohibited from doing so by the tax code. Nothing could be further from the truth. A non-profit does not operate with profit as its primary goal. However, if a non-profit continually spends more money than it takes in, thus operating at a loss, it will not be able to function for long and will have to close its doors. 

Another mistaken belief, though not always explicitly stated, is that a non-profit doesn’t have to keep good financial records. A common refrain among religious organizations is “We’re just going to leave it up to God. God will provide!” While that is absolutely true, to a certain extent, he put us in charge of managing our resources and he expects you to manage your resources well. Managing your group’s resources, whether donations or grant funds, is a way to be a good steward of the resources God provided to you. 

Whether your organization is service-focused or profit-focused, you must keep good financial records. 

This post just barely scratches the surface on the many questions you should ask before deciding to organize as a non-profit. If you’d like to talk about it more, or have specific questions, please contact me.