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Tools for nonprofit leaders: The difference between for-profit and not-for-profit organizations

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Not-for-profit organization leaders are routinely required to explain the difference been for-profit and not-for-profit organizations to new staff, volunteers, or the person next to them on the train. This article is a primer for you to use. Because there are so many variations of not-for-profit organizations, we are generalizing and focusing on typical, traditional not-for-profit organizations.

Wikipedia defines a not-for-profit organization (abbreviated “NPO” or “not profit” or “nonprofit”) as an organization whose primary objective is to support an issue or matter of private interest or public concern for non-commercial purposes, without concern for monetary profit. NPOs are active in a wide range of areas, including the environment, the arts, social issues, charities, early childhood education, health care, politics, religion, research, sports or other endeavours.

Not-for-profit organizations (NPOs) generally do not operate to generate a profit. However, in order to ensure their long-term stability, high performing NPOs maintain a surplus/reserve as a cushion to get them through unpredicted, difficult financial times. When the reserve exceeds what is reasonable, an NPO is expected to use additional funds to pay for activities that serve the organization’s purpose/mission.

NPOs are traditionally directed by volunteers who serve (unpaid) on the governing board/council.

For-profit organizations generally operate to make a profit for owners or shareholders. Their boards are usually populated by paid leaders who have required expertise in their field of endeavour.

By way of example, the Girl Guides of Canada is a not-for-profit organization led by volunteer women and supported by a paid staff. Air Canada, on the other hand, has a paid board and is led by a paid president who runs the company.

NPOs have members who elect a board of directors at each annual meeting and empower them to run the organization in compliance with their bylaws. The board appoints committees and hires a senior staff person (executive director, registrar, president) who then hires and manages staff.

The purpose of not-for-profit organizations varies: they can be charitable organizations, foundations or endowments (e.g. Canadian Cancer Society or the Society for the Prevention of Cruelty to Animals); industry/trade associations (Canadian Health Food Association or the Canadian Bottled Water Association); professional societies (Canadian Nurses Association or the Canadian Institute for Certified Accounts); special/common interest associations (housing cooperatives or local BIAs - Business Improvement Associations).

The Canadian government states that, “Unlike a business, or more specifically a share corporation where certain shareholders will be entitled to participate in the profits of the company (e.g., by receiving dividends), a not-for-profit corporation, also known as a non-share corporation, has members who are prohibited by the CCA from receiving any pecuniary gain. The purpose of these corporations is not to make money for members, but rather to carry on some activity of a national, patriotic, religious, philanthropic, charitable, scientific, artistic, social, professional or sporting character, or the like.”

Governments allow most not-for-profit organizations to be tax exempt because they augment or replace the role of government in providing services or solving problems for their constituents and for the social good. To understand the government’s requirements for not-for-profit organizations under the Canada Corporations Act Part II, click here. Registered charities have an additional level of complexity that you can also read about on that site.

While incorporated NPOs are legal “corporations”, it is not appropriate to refer to them as companies. They are NPOs and should be referred to as they are described in their name (e.g. association, society, council, college, foundation, institute, etc.).

Members do not own the association. If an NPO is dissolved, its assets must be given to another NPO with a similar purpose.

To protect its tax-exempt status, an NPO should refrain from activities not related to the mission of the organization, especially those offered by the for-profit sector.

NPOs have several governance models to choose from. The organization can be “volunteer driven”; in which case the volunteers not only establish policies and procedures but also roll up their sleeves and do much of the work. A “staff driven” organization is one where the volunteer board sets the strategic direction along with supporting policies and procedures, but expects their paid staff to do much of the work in implementing their plans.

In summary, whereas for-profit organizations serve the benefit of their owners, a not-for-profit organization is expected to serve a purpose (in many cases, the benefits of its work also serve the needs of its members and stakeholders).

Confused? Happy to hear from you.

Paulette in President of Solution Studio Inc., a consulting practice that serves the not-for-profit association community. Paulette co-authored two manuscripts on risk management & not-for-profit organizations and regularly conducts risk management, strategic planning and board development workshops. She can be reached at 1-877-787-7714 or Paulette@solutionstudioinc.com.

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