Two Basic Types of Organizations: For-Profit (Business) and Nonprofit

© Copyright Carter McNamara, MBA, PhD, Authenticity Consulting, LLC.
Adapted from the Field Guide to Consulting and Organizational Development and
Field Guide to Consulting and Organizational Development with Nonprofits.

Sections of This Topic Include

For-Profit Organizations
Nonprofit Organizations
Additional Perspectives on Nonprofit Organizations

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Also consider

NOTE: Many people would argue that a nonprofit organization is also a business organization, if they believe that a business is an organization that provides value to consumers and gets suitable value in return.

For-Profit (Business) Organizations

A for-profit organization exists primarily to generate a profit, that is, to take in more money than it spends. The owners can decide to keep all the profit themselves, or they can spend some or all of it on the business itself. Or, they may decide to share some of it with employees through the use of various types of compensation plans, e.g., employee profit sharing.

(We’ll read later about the legal forms of a for-profit, including sole proprietorships, partnerships and corporations. More information is available back in the main category Understanding Organizations.

Nonprofit Organizations

(The following information, in large part, was developed by Putnam Barber, President of the Evergreen State Society in Seattle, Washington)

A nonprofit organization exists to provide a particular service to the community. The word “nonprofit” refers to a type of business — one which is organized under rules that forbid the distribution of profits to owners. “Profit” in this context is a relatively technical accounting term, related to but not identical with the notion of a surplus of revenues over expenditures.

Most nonprofits businesses are organized into corporations. Most corporations are formed under the corporations laws of a particular state. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as nonprofit businesses on slightly (but sometimes importantly) different terms.

The Internal Revenue Service (IRS) gets involved because corporations are, in general, required to pay federal corporate income taxes on their net earning (another technical term, pointing to a slightly different way to the idea of a surplus of revenue over expenses).

Section 501 of the Internal Revenue Code lists several circumstances under which corporations are exempt from these taxes. Section 501(c)(3) — the famous one — describes corporations (1) serving charitable, religious, scientific or educational purposes (2) no part of the income of which “inures to the benefit of” anyone.

Tax-exempt nonprofit corporations can, and do, operate in all other particulars like any other sort of business. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity, including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; enter into contracts of all sorts; etc.

There are some specialized tax rules and accounting practices that apply to nonprofit corporations. If they are of a certain size, they are required to disclose many details of their operations to the general public and to state regulators and watchdog agencies using IRS form 990. This form shows any salaries paid to officers or directors and to the five highest-paid employees and contracts if any receive over $50,000 in the tax year (at the time of this writing in 1998). The form also requires the organization to divide its expenses into “functional categories” — program, administration and fund-raising — and report the totals for each along with the amounts expended on each program activity.

To understand more about nonprofits, see
Field Guide to Consulting and Organizational Development With Nonprofits (for consultants and internal leaders in USA and Canada)

Additional Perspectives on Nonprofit Organizations

For the Category of Organizational Development:

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