When many people think of a non-profit organization, they think of an agency that provides services for those less fortunate such as the Red Cross and Salvation Army. However, with over 1.5 million registered non-profits that have a total revenue that exceeds $1.6 trillion dollars a year, non-profits are a large part of the American economy and business word. Admittedly, there are a lot of non-profit groups that I would not have considered non-profit. So what is the difference between non-profit and for-profit organizations? Is there a difference? Because with a revenue that large (and almost double that in assets), non-profits are obviously a large part of our business structure.
Marc Epstein and J. Warren McFarlan recently published a book entitled, “Joining a Nonprofit Board: What You Need to Know” which spawned an article in Strategic Finance’s March 2011 publication that talks about the differences in these organizations. I will use this article titled, “Nonprofit vs. For-Profit Boards: Critical Differences”, as well as other literature, to help break down the similarities and differences in nonprofit and for-profit organizations.
Epstein and McFarlan discuss 6 ways in which nonprofits and for-profits are the same. I think it is safe to say that these similarities are rather logical. For instance, that either non-profits or for-profits can thrive or die and that their success isn’t guaranteed. Ask any new small business owner or a new nonprofit owner whether they are guaranteed success in their endeavor and they will tell you no. Other ways they are the same is that the ability of the administrative body to lead and manage the group is directly related to their success; planning, budget, and strategic planning are essential: “cash is king”; both contribute to society in different ways; and that both “face the challenges of integrating subject matter specialists into a generalized framework.” The essence of non-profit and for-profit organizations as businesses is the same. So what makes them different?
The ways that non-profits differ from for-profits can be broken down into three areas: the mission, financial gain, and governance. Of these three, the main difference between a non-profit and for-profit organization relates to its mission. A non-profit organization does not exist without a mission. Since non-profits help to fill the gap in services left by the government and for-profit sectors, if there is no mission – or no need – for the organization, it does not have a purpose and does not need to exist. Another difference is financial – that a non-profit’s board does not receive any direct benefit from the success of its business. In for-profit agencies, the stakeholders – the board or shareholders – receive some financial benefit from the company’s success. And finally, the governance of a non-profit organization is unique in that the all members of the Board of Directors are volunteers that do not get paid – nor expect to receive any type of compensation – for helping to run the organization. In fact, many members of non-profit boards make large monetary contributions to the organizations they serve and/or are expected to reach some type of fundraising goal in helping to maintain the organization.
Other ways that for-profit and non-profit boards have similarities and differences could probably take up several other blogs. We can break down a lot of the differences in governance structure, size, and involvement; discuss how to judge the organization’s success and failure; and relationship between Boards and the CEOs in these two types of agencies. The bottom line is that both non-profit and for-profit organizations are businesses. They both can expect to succeed or fail and that hands of their leadership, ability to make enough money to sustain itself, and they are both required to develop plans – strategic and budgetary – to assist in guiding the business. Their differences are much more specific. The main difference relates to a non-profit’s reliance on providing the services direct in its mission. The two other area – financial gain and board governance – also demonstrate marked difference from for-profit organizations. The board of a non-profit does not receive any financial gain from its governance of the agency, and in fact, it comprised of volunteers that may have fundraising requirements to remain on the board.