Difference between for profit and not-for-profit organizations


Learning objective:
What is the Difference between for profit and not-for-profit organizations?

Definitions:

For-Profit Organizations:

An organization that runs with a primary aim to maximize profits and pass them to shareholders is known as a for-profit organization. The secondary goals of such an organization are set to meet the primary goal of the company and to help keep the operations of company ongoing. Commercial conglomerates like Apple, Coke, McDonald, Ford, Financial Times etc. are all examples of for-profit organizations.

Not-for-profit Organizations:

An organization that runs with a primary aim to help society at large is known as a not-for-profit organization. Such an organization has some specific goals to help a certain section of society or a certain cause. This organization can be both public-funded, state-funded or a non-governmental organization (NGO). Greenpeace, Charity, Water, Human Rights Campaign etc. are the examples of not-for-profit organizations.

Difference between profit and not-for-profit organizations:

The major points of difference between profit and not-for-profit organizations are given below:

1. Ownership:

For-profit organizations are owned and controlled by the shareholders. These shareholders appoint directors which act as their agents to run the day to day operation of the company. Not-for-profit organizations are not owned by anyone. These organizations are run by board of governors or trustees appointed by the founding members, current personals on board or the government based on the nature and articles of association of the organization.

2. Income:

The income generated by a for-profit organization has to be distributed into the shareholders. Shareholder also get returns as appreciation of their capital investments in the shares. A not-for-profit organization do not earn or generate any income, rather it runs on funds and charities and reports a surplus or deficit balance by preparing an income and expenditure account. This money is again circulated into the society and is returned back to these organizations as donations.

3. Statutory Reporting:

Reporting formalities for profit-generating organizations are very strict. This red tape becomes more stringent in case of a public limited company, because general public has invested money in those companies and therefore transparency is very important. However, these rules and regulations are relaxed to a large extent for not-for-profit organizations and these organizations do not need to report or publish detailed financial statements.

4. Tax Returns:

Commercial businesses pay taxes. This is because their primary aims are to make money so they are liable to pay taxes on their operating income, whereas not-for-profit organizations do not pay tax. The reasons being, these organizations do not earn any revenues or profits rather, they collect funds which are then spent on community. This also minimizes the need of government spending in the respective sector where not-for-profit organization operates. However, not-for-profit organizations are liable to pay property and any other state taxes.

5. Evaluation:

The results in a for-profit organization are evaluated based on financial health and returns. Some examples of such metrics are profitability ratios, liquidity ratios, gearing ratios etc. The evaluation basis in not-for-profit organization is completely different where appraisal mechanism depends on 3 E’s; efficiency, effectiveness, and economy. Where meeting deadlines are important in for-profit organizations, the contributions made by people or groups is important for a not-for-profit organization.

Conclusion:

The economy especially the GDP growth of a country depends upon the extent of industrialization in that country. For-profit organizations are very important as they reflect the level of economic activity in a country. These organizations create most employment and serve as backbone of stock exchanges. Not-for-profit organizations are important as their primary objective is philanthropy, utilitarianism and greater good of the society and environment. These aspects help boost the morale and living standards of people in a certain way. These organizations work in different sectors including education, health, childcare, social issues, pension funds etc. Especially in developing countries these organizations act as social agents for economic and social development.

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