If you are thinking about starting your own small business, one of the key considerations you must decide on your business mission. The mission for your business will then determine whether your company should be incorporated as a for-profit or a nonprofit corporation.
A company's mission is a clear representation of the enterprise's reason for existence. Typically, a mission should be broad in scope so that you are not limited later on by a mission that does not fit economic realities or opportunities. For example, the mission of a small for-profit upscale clothing store might be to provide one-of-a-kind wardrobe opportunities for the discerning woman. Similarly, the mission of a nonprofit food bank might be to provide meals for homeless people in inner-city areas where there are no other such services.
Nonprofit Corporation Defined
Think back to your mission statement. If you want to start that food bank, you will probably want to incorporate as a nonprofit corporation. A nonprofit corporation is a business organization that serves a public purpose, in the case of the food bank it serves the hungry. There is a societal benefit to having the food bank serve meals in inner-city areas. Because of this benefit, nonprofits enjoy special tax and other treatment under our laws. While nonprofits can make profits, they can not be organized especially to make money. The food bank can sell sweatshirts with the food bank logo on them and make money to support its operations. But, the food bank cannot be primarily organized to generate profits.
Types of Nonprofit Organizations
Because of their societal benefit, nonprofit organizations receive tax-exempt status from the Internal Revenue Service. The IRS identifies types of nonprofits that qualify for this designation. Generally these are organizations set up to do charitable educational, scientific, religious, art and cultural work, and serving basic human needs. The food bank, for example, would be a nonprofit serving the basic needs of less fortunate people in society. Also, nonprofits cannot engage in political work and maintain their tax-exempt status.
For-Profit Corporation Defined
A for-profit corporation is organized for the purpose of making money. The upscale clothing store is in business to make money for its owners or shareholders. For-profits do not have a societal purpose, that is, society does not deem providing women with one-of-a-kind wardrobes as something society as a whole need be concerned about. Many for-profits, however, will claim a social need. A startup energy wind farm, for example, may help the world reduce carbon emissions, but its main goal is to make money for its shareholders.
Types of For-Profit Corporations
Just as with nonprofits, there are many different types of for-profit corporations. The differences generally concern the ownership structure and the amount of liability owners and shareholders are responsible for. Limited liability is the most important aspect of a corporation. Shareholders participate in the profits of the corporation but are nor held personally liable for any debts the company incurs.
Deciding Between Two
Deciding whether to establish your business as a for-profit or a nonprofit is based on your future company's mission -- what you expect to accomplish. A good rule of thumb is nonprofits serve a public need and for-profits are established primarily to make money for shareholders.