Becoming a not-for-profit does not mean there is none.
There is often confusion surrounding the definition of an organization that calls itself a "not-for-profit" company. A not-for-profit exists for reasons other than to make money, but misconceptions persist concerning whether it is allowed to make money at all or how it might differ from a non-profit company. Adding to the confusion are questions such as: how a not-for-profit derives its income, whether it can have paid employees who earn bonuses and even if it can declare dividends, or must pay taxes.
Structure
Just because an organization is called a not-for-profit company, does not mean that it cannot make a profit. In fact, an organization has to acquire and maintain a financial framework to stay viable. Being a not-for-profit means that the organization's primary purpose is not profit, but the provision of specific services to a defined audience.
The entity may operate as a formally-incorporated not-for profit with employees, shareholders or as a membership association. It may even function as a de facto group of individuals united for a specific goal: for instance to reduce neighborhood graffiti. It may limit its activities to functions like providing training conferences, making loans, or serving a specific niche, such as a geographic region, or a cause, such as the environment. Not-for-profit structures may have designated board of director representatives who represent the full membership or they may have no members at all.
Terminology
The terms "non-profit" and "not-for-profit" are sometimes used interchangeably. They mean generally the same thing; an entity organized for a purpose other than profit. Important differences do exist however. The "non-profit" term tends to be used for charitable, cultural or scientific organizations which exist to serve an informational or community need. These organizations generally carry an official, federal, tax-exempt status and contributions to these organizations are tax deductible. Often these organizations exist because they solicit donations or grants, although they can also have members.
Sports organizations, political organizations, private clubs and advocacy groups are not-for-profit institutions. Contributions to them are not tax deductible and above certain income levels they generally report income and pay taxes.
"Not-for-profit" terminology also refers to organizations operating in categories in which they compete with for-profit companies for the same audience. Often these not-for-profit companies are shareholder or membership organizations which either charge member dues or require that those they serve fit geographic, ethnic, income, education or trade/industry requirements. While non-profit entities do not pay taxes, not-for-profit organizations do sometimes pay taxes.
Purpose
The line between not-for-profit and for profit can appear blurry. There is nothing preventing competition between a for-profit aquarium, for instance, and a non-profit aquarium. The difference is that the for-profit entity measures its success as revenue and profit, and pays taxes. The not-for-profit may not pay the same taxes (depending upon its not-for-profit filing type) and gauges success by such measures as: numbers of memberships, quality of educational programming, savings to members or percentage of disadvantaged populations served.
Governance
Some not-for-profit entities may operate informally, with only all-volunteer involvement; a neighborhood community association is an example. Others, such as credit unions or major granting institutions, have formal governance structures with trustees or a board of directors. These governing bodies carry fiduciary responsibility to monitor the activities of the company and provide oversight of key committee work, such as investment portfolios or loan activities. This oversight assures compliance with local, state and federal regulations.
Laws govern how not-for-profit entities are set up, with special focus on how organization activities are conducted and the flow of money is reported. Even a not-for-profit organization with finances below $25,000, must at least register annually with the Internal Revenue Service to remain a legitimate not-for-profit.
Examples
Not-for-profit companies come in all sizes. One of the largest examples is the Bill and Melinda Gates Foundation; with a $35.2 billion dollar endowment focused on global children's health initiatives. It is the largest in the world. Rotary International operates internationally as a global business/international cooperative member association and a far more modest reserve. Interestingly enough, even the New York Stock Exchange was a not-for-profit membership association until it became a publicly-traded company in 2006.
