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5 Key Differences Between Founding a For-Profit and a Non-Profit Startup

While they may look similar on the surface, these two paths are drastically different.
Andrew Deen has been a consultant for startups in almost every industry from retail to medical devices and everything in between. He implements lean methodology and currently writing a book about scaling up business. Twitter @AndrewDeen14
Andrew Deen has been a consultant for startups in almost every industry from retail to medical devices and everything in between. He implements lean methodology and currently writing a book about scaling up business. Twitter @AndrewDeen14

From the way many successful non-profits are run, it’s easy to assume that the differences between operating a non-profit and a for-profit organization are minimal. However, it’s a very different animal, from the motivations to the management to the regulations. If you’re a socially conscious entrepreneur trying to decide between starting a for-profit or non-profit organization, there are some key differences to keep in mind before you embark on your journey. Let’s take a look at what some of those differences are.

1. Core Values

Every organization should have strong core values—it helps establish trust in the community and can help inform business decisions. However, core values for a non-profit need to be even clearer and well-defined than those created for a for-profit business. The overarching purpose needs to come first. Non-profits need to have a clear visions and goals in order to build a community of donors and solicit grant money in some cases.

2. Meaningful Work vs. Monetary Incentives

With few exceptions, people who work for non-profits don’t expect to make big bucks. They do the work because they find it meaningful, and they enjoy giving back to the community. Think about it—social workers, teachers, and others serve the public knowing that they will work hard and probably never become wealthy, but they will help society as a whole. This means that the non-profit workforce is very passionate and dedicated. However, some very talented people who are more driven by monetary incentives simply aren’t interested in working for a non-profit over a startup with unlimited revenue growth potential.

3. Federal, State, and Local Regulations

Non-profits are tightly regulated—and for good reason. These organizations are exempt from some federal, state, and local taxes, and tax records are generally available to the public. A non-profit must have a definite social purpose, but this need not be charitable. Other non-profits are religious, scientific, educational, or supply other benefit to the community and the public.

While their tax-exempt status (which does not apply to taxes on employees’ salaries) means that there is more money available for the organization’s main goals and purpose, it also means that non-profit startups have to abide by more regulations and bureaucracy as they grow, which can be frustrating for founders.

4. Board Size and Influence

Boards in startups tend to be made up of investors, and they are often fairly hands off, leaving most decisions in the hands of the founders. Non-profits, on the other hand, are overseen by larger boards that must work together and make decisions. No single person has the ultimate say, and board members are generally volunteers, interested in furthering the organization’s goals and purpose.

5. Public Ownership

While most startups are built with the goal of paying out to its founders, employees, and shareholders, non-profits are different. Any surplus must be reinvested into the cause, not added to executives’ paychecks. There are no shareholders to pay—non-profits are not privately or publicly held with shares. While a for-profit business may reinvest in the business for growth purposes, non-profits endlessly reinvest for the cause they champion.

Non-Profit, For-Profit, or For-Profit with a Cause

Hybrid companies do exist—mainly for-profit companies with a special interest in a social, economic, or environmental cause. This can be a great compromise for founders who are more interested in running a traditional for-profit business, but want to contribute to society as well. TOMS shoe company is a good example of this—they are famous for donating one pair of shoes for every pair sold, and contributing other resources to families around the world, mostly in rural communities and developing countries. Some companies also spin off a non-profit on the side—buoyed by the for-profit enterprise.

An Important Decision

Any entrepreneur deciding whether their concept fits better in the non-profit or for-profit world has a lot to think about. You’ll want to do extensive research before you get started, and it’s essential to be honest with yourself about what you want. Are you going to be happy with taking a smaller salary to make societal contributions? It’s an important decision, so don’t rush it. Build the business you want!

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