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What is the difference between for-profit and not-for-profit groups?

For people about to begin sitting on a not-for-profit board, particularly those whose experience is rooted in the commercial sector, it is useful to consider the differences between the for-profit and not-for-profit sectors. Many new not-for-profit board members are surprised or even shocked as the realities of their new context sink in.

For-profit and not-for-profit groups, and the boards that serve them, are not the same. They operate under different pressures, have different purposes, different cultures and serve a different group of stakeholders. And those who serve on their boards face different challenges as well as different rewards.

The question of profits

On the surface, the difference between the for-profit and not-for-profit sectors is simple to ascertain: for-profits make money and not-for-profit organisations do not.

However, this explanation is misleading. Most not-for-profits also make money – after all, they also need to pay staff, rent offices, provide mail-outs or newsletters and pay phone and electricity bills. In short, they need to cover their costs.

Not-for-profit organisations may also generate profits – i.e. make more money than they spend. The difference between for-profits and not-for-profits is in how those profits are handled. While for-profit organisations are free (within the bounds of the law) to keep the money they make, share it, reinvest it in the business, or generally spend it as they see fit, not-for-profit organisations may not distribute surpluses to members – profits must be held and/or invested back into the organisation.

The mission

Many people see the for-profit and not-for-profit sectors in clear-cut, value-based terms, with for-profit organisations being driven by the pursuit of money and not-for-profit organisations existing to contribute something to society or the community. This "community contribution" can take many forms, from fighting fires to sewing quilts, from lobbying for rights to putting on a show.

However, the distinction between the two sectors has blurred somewhat in the modern age of corporate social responsibility, as companies are subject to greater and greater demands to be more "community friendly". And at the same time as many businesses are becoming more socially responsible, many not-for-profit organisations are becoming more entrepreneurial, undertaking strategic planning and adopting other measures previously considered the exclusive domain of the business world.

That said, it is still true that not-for-profit and for-profit organisations are generally defined by their differing missions – while some for-profits may see "being good" as a means to and end (i.e. being good for business), not-for-profit organisations see "being good" as the end in itself. They exist to fulfill their mission, whether that mission is to fight fires, make quilts, change social structures or put on a play that packs them in the aisles.

This social mission often makes it much more difficult for not-for-profit organisations to gauge results and assess their effectiveness. Indeed, understanding and adapting to this fundamental difference between the two sectors has been identified by many experienced board members as the most challenging aspect of their role.

So when the bottom line is not the last word in the success of your organisation, what is? The answer depends on the particular mission of the not-for-profit organisation but it will necessarily include properly serving the organisation's "owners".

Who are the "owners"?

While business ownership is generally clear-cut, ownership of not-for-profit organisations can at times be more confusing. While people may pay to set up a community group and even fund its operations they do not, in the strictest sense, "own" the organisation, as they cannot benefit financially from the group. The group, if it is incorporated, is a legal entity unto itself. It can sue or be sued, enter into contracts, hire staff, receive donations, etc. Profits cannot be given to those who paid to set up the group, but must be held for use by the group.

It is more useful, then, to see ownership of a not-for-profit group as being vested in its stakeholders – the people or groups that have an interest in or may be affected by a particular decision or action. A community group's stakeholders can include its "consumers" (i.e. those using or benefiting from the services provided), the members of the group, donors, sponsors, staff members, governments and society at large (which funds the tax breaks provided for not-for-profit organisations and expects certain things in return).

Board members must take into account all of these people and groups when assessing to whom they are accountable, a situation that can sometimes lead to a degree of confusion and conflicting agendas. A user of a homelessness service, for example, may have a different idea about the best way of addressing his or her needs than the people running the shelter, or the organisation that is providing funding. This issue is discussed further in the To whom is my board accountable? help sheet.

In the eyes of the law

For-profit and not-for-profit organisations are, in some circumstances, viewed differently in the eyes of the law. Taxation is one example of this. Most not-for-profit organisations receive tax breaks in some form or another, although what sort of tax break will depend on the type of organisation and its function. The Australian Taxation Office groups not-for-profit organisations into six different entity types:

  • not-for-profit organisations;
  • community services organisations;
  • charities;
  • public benevolent institutions (PBI);
  • religious institutions; and
  • deductible gift recipients (DGR).

All not-for-profit organisations fit into one of these groups, some into several and some may fit into all six categories. Possible tax concessions include a tax-free threshold, income tax exemption, tax deductible gifts, refund of imputation credits, fringe benefits tax rebate, fringe benefits tax exemption and GST concessions. In return for the financial advantage provided by tax concessions, there is an implied expectation by society that not-for-profit organisations will act responsibly, remain true to their missions and in so doing make a contribution to society.

As mentioned earlier, for-profit and not-for-profit organisations are also viewed differently by the law in terms of how they can deal with profits.

However, it is important to note that when it comes to expectations and responsibilities of the board, the law does not view not-for-profit organisations as distinct from their for-profit cousins. For this reason it is imperative that board members know exactly what is required of them. See the Overview of your legal responsibilities and Overview of your financial obligations help sheets for more information.

Pressures

Many of the pressures and challenges experienced by board members in the for-profit sector will be equally applicable in the not-for-profit arena. They are both charged with overseeing the organisation and ensuring its financial health, they are subject to the same high standards of conduct and both have a range of financial, legal and ethical duties to fulfill.

There are also some similarities in how for-profit and not-for-profit businesses are run. For example, like their business cousins, most not-for-profit organisations have to face stiff competition – but rather than for a product, they are most often competing for funds, members, sponsors, media exposure and supporters.

However, there are some pressures that are more pronounced in the not-for-profit sector. At the most basic level is the consideration of time and money. Because many not-for-profit board members are volunteers trying to squeeze their service in among the demands placed on them by paid employment and social and family commitments, and because most are unpaid, the "time squeeze" and the temptation to put board service to the bottom of the "to do" pile may be more pronounced than for those in the business sector.

Other pressures derive from not-for-profit organisations' mission-based, rather than profit-based, focus. Firstly, there is the challenge of operating within a climate of scarce resources. This takes not-for-profit organisations, and their board members, into different and highly challenging arenas as they develop methods for raising funds and keeping their organisation in good financial shape. Securing sponsorships, bidding for grants and holding fundraising events from chook raffles to black-tie balls can be all in a day's work for not-for-profit community groups.

And while businesses may be subject to strict financial reporting rules, that is nothing to the standard reporting requirements for not-for-profit organisations – not only must they report to the usual government bodies on their financial health, they have others demanding financial reports too. This is because they are usually, in effect, using other people's money. Funders often place strict conditions on how their money is used and usually demand rigorous reporting of how it has been spent.

With ever-increasing competition for a piece of the funding pie, not-for-profit organisations are also increasingly facing pressure to diversify their revenue base and/or become self-sustaining through investments or social enterprises, for example. At the same time, because they are seen to be working for the good of society, not-for-profit organisations can also face harsh criticism when they do venture into the money-making arena. Something as simple as charging admission to a seminar can provoke a rebuke from the community.

Despite attempts to become more self-sustaining, most not-for-profit groups remain heavily reliant on fundraising. An associated pressure is derived from the demands of fulfilling funders' expectations, particularly if they diverge with those of the board, the staff, the consumers and other stakeholders.

Those whose experience is rooted in the corporate world may also be surprised at the different pace of the not-for-profit sector. While bigger groups may have managers in place, for many smaller groups, decisions will often have to wait until the next board or membership meeting.

Not-for-profit organisations also face different challenges in terms of their workforce. Most have access to the benefits of unpaid labour that derive from the use of volunteers. While this can be a boon for cash-strapped groups, volunteers also bring challenges – they have to be recruited, trained and monitored, they often have to be insured and they usually expect something in return for their service, even it if it is just a thank-you.

Paid staff can also operate differently in a not-for-profit setting when viewed alongside their commercial counterparts. Many people opt to work for not-for-profits because they are attracted by the idea of working to benefit society and they may see forgoing a fat pay packet as a good swap for the satisfaction they can derive from working for a cause. While this does not mean that not-for-profit employees should be poorly paid, it is useful to note that their motivations and view of rewards may differ from those in other sectors. Of course, on the flip side, many not-for-profit employees will see their position as just another job and almost all employees will, at some time or other, feel frustrated at having to work within a sector often characterised by shortages.

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