If you have an entrepreneurial spirit but are also looking for opportunities to contribute to the greater good of society, then you might be wondering what the best legal entity or business classification is to select for your new enterprise.
While most people are familiar with private companies, terms such as nongovernmental organizations (NGOs) and nonprofit organizations (NPOs) are good to know when you want to work on behalf of a societal cause.
This article clarifies many of the questions anyone interested in creating a nonprofit startup may have.
What makes private businesses and organizations unique?
Whether they are privately owned or publicly traded, a private, for-profit enterprise is an entity with the primary goal of making money. This is typically accomplished by providing a service or selling a product. The owner of the business earns their income from the profits generated after expenses are paid.
For entrepreneurs wanting to mix for-profit with purpose, becoming a Certified B Corporation may be an avenue to pursue. B Corps must factor in impacts to the environment, the wellbeing of their workers and customers, and the community into their business plans. Additionally, private businesses can embrace charitable causes such as homelessness, animal rescue, or support of the arts.
What makes a nongovernmental organization (NGO) unique?
NGOs are generally created to take on large-scale projects and typically focus on high-need problems around the world. NGOs are usually nonprofit in classification and work alongside a country’s government. A very well-known example of an NGO is Médecins Sans Frontières/ Doctors Without Borders, which delivers urgent medical care throughout the world.
Other areas where NGOs can be found include:
- Public health and humanitarian crises
- Environmental issues
- Economic programs such as small business support or job training
- Social concerns such as women’s rights or poverty
What makes a nonprofit organization (NPO) unique?
Nonprofit organizations are created to address a wide range of societal issues, from religious faith to preventing cruelty to animals. While staff who work at the nonprofit are allowed compensation, any profits generated must be re-invested into the nonprofit’s mission. Nonprofits, like NGOs, are registered and classified as charitable organizations. As a result, all donations made to them (financial, material, or in-kind donations) are considered tax-deductible.
Unlike a private company, no individual or group “owns” a nonprofit. Decisions about the strategic plans and operation of the nonprofit are made by a board of directors who work with the nonprofit’s administrative director and staff. Typically, a board works in harmony with the administration, but the board does have the final say. If a board determines that the nonprofit is no longer solvent, is not following its nonprofit business strategy, or the director needs to be replaced, then those are decisions the administration must follow.
NPOs benefiting the public in many ways
While NPOs can be national or even international in scope, many NPOs are small and created to address particular concerns in a community or region. These could include providing workforce training to economically disadvantaged youth, establishing an organic farming collective, creating a museum, cultural center, or community arts venue, addressing environmental concerns such as litter, pollution, or unsafe drinking water, or medical research advocacy such as the Cystic Fibrosis Foundation or Glioblastoma Foundation.
Every nonprofit is somewhat unique, and the possibilities for creating them are nearly unlimited – as long as they’re designed to benefit the public.
The difference between nonprofit (NPO) and “not-for-profit”
Many people use the terms “nonprofit” and “not-for-profit” interchangeably, but there is a difference between the two regarding what business actions are allowed. It’s important to be familiar with these differences before starting up a nonprofit organization.
There are five differences between an NPO and a not-for-profit:
1. Employees of nonprofits are paid. Not-for-profits are run solely by volunteers. Think of it as the difference between the YMCA and a community softball league.
2. Nonprofits need to stay financially solvent even if profits are invested within the organization. Not-for-profits are “recreational organizations” and do not need to earn revenue.
3. Nonprofits must fulfill a mission that benefits the public good. Not-for-profits exist to achieve organizational objectives.
4. Nonprofits are allowed to create a separate legal entity, while not-for-profits are not.
5. Nonprofits are classified as a 501(c)(3) by the IRS. Not-for-profits are usually considered a 501(c)(7).
If you’re not sure if your entrepreneurial idea should be classified as an NPO or an NFP, then consult with an accountant or business consultant specializing in this area.
Private company, NGO, or NPO: Which is best?
There’s no #1 best choice for how to classify your business idea. Each option has its pros and cons. However, taking time to evaluate your business plan and strategic objectives will help you determine which avenue is best for your endeavor.
Regardless of which option you choose, every new business or organization needs to file as a business entity in the state that it operates. If you initially select one option but decide to switch to another as time passes, then changing your entity status is possible – you are never locked into your initial choice. Get ready to launch that startup and make those entrepreneurial dreams come true!