Vail Law: What’s the difference between nonprofit and for-profit? (column)
“What’s the diff?” a client of mine recently asked.
“A nonprofit and a regular corporation.”
“A for-profit one?”
Good question, I thought.
So here we go.
The main “diff” between a nonprofit and a for-profit corporation is, well … profit. Duh. But what exactly does that mean?
First, what is a corporation? Part of the answer may seem obvious and part may not.
Legally, a corporation is a legal being created under applicable law ordinarily consisting of an association of one or more individuals who, as the body of the entity, have a distinct existence separate from its members. If, for example, you and I wish to create a corporation — let’s call it YouandMe Inc. — the entity, if properly formed will have its own existence separate from either one of us or the two of us. It’s a sort of Frankensteinian “It’s alive!” sort of concept.
By following the rules of corporate formation, we have breathed life itself into a new legal being. Coca Cola is itself; it is not the shareholders who own it, the managers who manage it or any of its employees. But at law, it is just as “alive” as any of them … maybe moreso as corporations may live in perpetuity. While all of us will one day pass, a corporation may well be immortal.
It gets tricky here
What is perhaps the non-intuitive part is that, at law, a corporation is a “being,” sort of the same as you and me with its own legal identity and rights. If this was ever in doubt, the controversial 2010 Citizen’s United case settled the matter with a holding to the solar plexus.
In that case, the United Supreme Court ruled that, as corporations were sorta the same as people, corporations had the right to free speech including the right to speak (and spend money) in support of political matters. Specifically, the court held that political spending is a form of protected speech under the First Amendment, and the government may not keep corporations or unions from spending money to support or denounce individual candidates in elections. While corporations or unions may not give money directly to campaigns, they may seek to persuade the voting public through other means, including ads, especially where these ads were not broadcast.
So a corporation is a legal being.
What kind of being, then, is a for-profit corporation as compared to a nonprofit one?
The essential difference is in “purpose.”
The Houston Chronicle’s James Green has explained it neatly. “While the aim of for-profit organizations is to maximize profits and forward these profits to the company’s owners and shareholders, nonprofit organizations aim to provide society’s needs. Nonprofit organizations have no owners. Instead of maximizing profits, which means maximizing revenues while minimizing costs, they are more concerned with ensuring the revenue is greater than costs. This ensures that the nonprofit can still provide society’s needs.”
Another hallmark that distinguishes a nonprofit from its more avaricious sibling is, as it has no owners, its income is not paid out to what in a for-profit setting would be its shareholders. Instead, its income is plowed back into the nonprofit in order to fulfill its mission.
What about income?
What makes some folks scratch their heads is the concept of “income.” Yes, yes, just like a for-profit corporation, a nonprofit must have income. How else to fund good works? And yes, a nonprofit may pay salaries and overhead to keep the boat afloat. Rent, computer software and staples do not grow on trees. The distinction is, however, what happens to what is left over when the operating expenses are fed and tucked in bed. In the for-profit world, the excess is paid out as dividends. By comparison, the excess fertilizes the nonprofit garden.
Another key distinction is in the treatment of taxes. While for-profit organizations are responsible for paying taxes based on their net income, nonprofit organizations get a pass. They are exempt. Since the nonprofit’s goal is to breathe peace and joy, fairy dust and puppies into the atmosphere and to generally make the world a better place, instead of holding out his hand, Uncle Sam tucks it neatly in the pocket of his striped pantaloons. Hey, too, if you make a donation to a nonprofit, besides feeling warm and tingly all over, you may enjoy a tax deduction in exchange for your largesse. In addition, as for-profits and nonprofits are fundamentally different, there are generally different financial reporting requirements.
Can a nonprofit earn an income? The answer is “Hell yes!” Many multimillion-dollar income generators — think of many university hospitals for example — are nonprofits. Can a nonprofit’s management and workers earn a tidy salary? See above. Setting aside the mission/purpose part of the equation, sometimes the only key distinction between a for- and not-for-profit corporation is how “profit” is applied. In the first instance, to earn a return on investment. In the second, to plant the seeds that presumably will grow into good works.
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddison, Tharp & Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody and divorce and civil litigation. Robbins may be reached at 970-926-4461 or at his email address, firstname.lastname@example.org.