When you consider starting a business, you should first know the difference between a for profit and a nonprofit company. There are only a few distinctions, but they make all the difference.
The difference between a for profit and a nonprofit basically boils down to ownership and how to pay those in charge.
Ownership
The main difference between a for profit and a nonprofit is ownership. Shareholders or members own corporations and LLCs respectively. A sole proprietor owns his or her company as a personal asset. However, a nonprofit legally has no owners. Instead, you have managers. These managers have a duty to do what is in the best interest of the nonprofit.
Additionally, you can have stakeholders, which are not the same as owners. For example, a trade group like The Public Relations Society of America Inc. is a nonprofit that serves public relations professionals. Those professionals are the stakeholders. They don’t own the nonprofit, but the nonprofit does have to take their interests into account.
Put another way, when you set up your nonprofit, you made a promise to look out for certain people. These are your stakeholders. They might not have any right to control the nonprofit, but your nonprofit still owes them a legal duty. Not all nonprofits have stakeholders though.
Simply put, you cannot own a nonprofit. Because you don’t own it, you can’t sell it, transfer it, or do any of those types of things.
Payments
The second difference between a for profit and a nonprofit is payments to those in charge. With for profit companies, you obviously have a lot of choices on how to pay yourself. If you work in the company, you can earn a salary, commission, royalties, dividends, and many other types of payments.
In a nonprofit, you can really just pay those in control regular wages. This can be salary or hourly. On top of that, the salary has to be reasonable and set by non-interested board members. Therefore, you never get to set your own salary.
Under North Carolina’s Nonprofit Corporation Act and the Internal Revenue Code, you cannot pay out profits to those in charge. Additionally, to obtain 501c3 recognition, you can’t pay out profits to members or stakeholders either. In my opinion, this is a complicated way of handling this. Instead, you’re perfectly fine if the board of directors sets salaries and no one gets bonuses based on revenue.
Conflicts of Interest
You may have a contractual duty to avoid conflicts of interest in a for profit. However, you have a statutory duty to avoid them in nonprofits.
A conflict of interest is something that happens any time someone gets to vote or decide on something that benefits them directly. For example, if you get to vote on whether or not you get a raise for next year, that’s a conflict of interest. This all falls back to your legal duty to stakeholders and the community at large.
Conclusion
There you have it! There’s more than one difference between a for profit and a nonprofit. Ownership, payments, and conflicts of interest are all important differences. There are others, but they stem from these 3.
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