I hear a lot of talk these days about “for-profit organizations” and “not-for-profit organizations,” but I’m not sure how much the general public actually knows the difference between the two. It seems obvious, of course. A for-profit organization is for-profit and a not-for-profit or nonprofit organization is not-for-profit.
What does that actually mean?
It is complicated because there is an amalgam of federal and state laws, including corporate and tax law. When people use the term “organizations” they usually, but not always mean a corporation. An organization is a creature of state law. That means that if you want to start a corporation or form a partnership or organize a nonprofit organization, you have to look at the laws of your particular state as to how to do so. And each state statutes set forth the difference between a for-profit and a not-for-profit organization. Where the federal government comes in concerns how the organization is taxed. I’ll save the discussion of taxes until a later post.
Some people think that working for a non-profit means that you can’t get paid.
This isn’t true. For example the American Bar Association and the American Cancer Society are both not-for-profit organizations. Each of them have substantial staffs who are on salary. Just like any other “business,” the people who work for a not-for-profit go to work each day, do their job, and get a paycheck (or more likely these days direct deposit) like anyone else.
The difference is ownership. A for profit organization is a business. Plain and simple. In a for-profit corporation, the business has owners or shareholders. McDonald’s is a for-profit corporation. It has shareholders who own the shares of its stock. That means that they actually own a fractional piece of the business. When McDonald’s sells enough Chicken McNuggets and makes a profit, it declares a dividend, what that means is that the profit of the Corporation is being distributed to the owners.
My law firm is also a for-profit business. It’s a limited liability company taxed as an S corporation for federal tax purposes. I work to make money and hope to make a profit. While my law firm pays me a salary because I am an employee of it, I also as an owner can take distributions of the profits (if any). Nationally, it’s actually a very contentious issue with the IRS as to how much the owner of an S corporation can take as a corporate distribution as opposed to salary because of the employment taxes, but that’s a topic of another post.
The point is that the shareholders of McDonald’s own stock in a corporation. They own the stock because in the long run, they expect to receive distributions of the profits. That’s why people buy stock and why it is valuable. If people think that a company will not make a profit, then the price of its stock goes down.
But if a not for profit corporation has excess funds, who is entitled to the distribution? Who owns a not for profit?
No one. That’s the key difference.
Florida Statute section 617.01401(5) defines a not for profit corporation as one where “no part of the income or profit of which is distributable to its members, directors, or officers.” Notice that it did not even mention shareholders or owners because there are none. So in a not for profit, not only are there no shareholders or owners, but the, directors, officers or members are not entitled to a share of the “income” or “profit” either.
So for example, there is a legitimate non profit organization called the American Association of Jewish Lawyers and Jurists (AAJLJ), which I guess technically, you can call a Jewish American Bar Association. It is the US affiliate of the International Association of Jewish Lawyers and Jurists. According to the AALJJ’s website, which is Jewishlawyers.org, they have many laudable goals, including working to safeguard the civil and human rights of Jews and others in the US and abroad, promoting the study of Jewish law and ethics through law school courses, and masquerading as a Bar Association so that they can operate a for profit paid referral service running dubious advertisements to make money for its owner.
Ok, I was just kidding about that last part.
But that’s an important distinction. It does not have owners, and it is not in the business to make a profit. According to its tax returns, which for non-profits are open to public inspection, in 2007 the American Bar Association had total revenue of $154 million with an “excess” (not profit) of $7 million. If the ABA were a for profit, then (1) it would have to pay taxes on that excess and (2) its owners would be entitled to a dividend distribution.
There’s nothing wrong with being for profit. As I said, my business is for profit. We all have to make a living. Sometimes, you just have to be careful as to whether or not an organization gives an impression of being a non-profit (without directly stating so), when in fact, it is a business enterprise.