Nonprofit vs. for-profit business models

Michael Boyd

Business entities in our community are either for profit or nonprofit. Each has its purpose and in economically healthy communities there is a strong positive relationship between the two segments.

There are many similarities in organizational structure in each of these segments as well as distinct differences that place them into one segment or the other.

Revenue: Both types of organizations need money in order to operate. For profit businesses earn money be selling goods and services to their target audience at a price that covers the costs of production with a margin of profit. Profits are then retained or distributed. Retained earnings fund future growth. Excess profits are distributed to the owners and or shareholders. In nonprofit organizations, revenue streams come from a variety of sources; donors, memberships, contributions, private and government grants. Revenue covers the operating expenses and is then used to expand services based on the mission of the non-profit. There are no owners or shareholders in the nonprofit. Excess revenue is put back to operations to fund the mission objectives.

Taxation: For profit businesses pay taxes on their profit based on the tax code. Nonprofit businesses do not pay income taxes on their revenue stream even if there is an excess at year’s end. Each must pay real estate taxes. Each must also withhold and pay taxes on employee earnings.

Organizational Structure: For profit organizations and nonprofit organizations have similar organizational structures. Each has an executive leadership team, an operational staff, an administrative support staff, an accounting department, a marketing/communications team, and both have “other duties as assigned” written into every job description. The differences are in the terminologies. For profit firms have sales revenue. Nonprofits have membership fees, donors, and grants. For profits have customers. Nonprofits have clients. For profits have customer service representatives. Nonprofits have intake specialists and case managers.

Purpose: Each type of organization has a clear purpose. Both strive to serve their customers/clients in the most effective way possible given the restraints of operating capital and economic conditions. For profit businesses achieve this objective by identifying their market niche and connecting to customers through a variety of strategic design models. Nonprofits fulfill their purpose by identifying their niche and creating the revenue stream via donors, members, and grants that enables them to serve their client base.

In general, there are many similarities between these two types of organizations. In our community there are many avenues where the for profit world overlaps with the nonprofit segment. For example, Hagerstown Community College has a foundation that accepts private sector contributions used to provides scholarships to many students every year. The Community Foundation of Washington County MD awarded $22 million dollars through its grant and scholarship program. Their sponsors include a variety of for profit businesses as well as individual donors.

The symbiotic relationship between nonprofit organizations and for profit firms is a powerful yet delicate relationship whose sustainability is in everyone’s best interest.

Michael Boyd is the workforce development and business program manager at Hagerstown Community College. His email is mdboyd@hagers towncc.edu.