ESYB2 081 - Difference Between For Profit and Nonprofit
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[00:00:00] Many entrepreneurs ask, what is a nonprofit or they think I want to open a nonprofit so I can do good in the world. So let's talk about what exactly is a nonprofit and what's the difference between a nonprofit and a for profit. Well, one very core difference is taxation. When you apply to be a nonprofit with the IRS in United States, you get a lot of tax breaks.

That's a really good perk. Now, there are some restrictions. Additional differences are in the ownership structure, and especially importantly, in how you distribute revenue, because a nonprofit is not allowed to save profits, meaning at the end of the year, the nonprofit has to redistribute all the leftover revenue into the sustainability of the company.

That can mean paying the owners more. So it's not like all the. Non profit owners or entrepreneurs are saints. You think, [00:01:00] like, let's say you're donating to a good cause, the ownership group or the management group, they don't have to answer to anyone, so they can say, Hey, you know, we're just going to give ourselves bigger bonuses.

It's not out of the question. It's not like just because you have a non profit, that means you do great in the world. A lot of charities A lot of the money they collect, instead of redistributing it to good causes, they just pay themselves more. But generally, that's a huge difference between a non profit and a for profit because a for profit actually can put money into its bank account, can have money left over, can reinvest in growth, all that.

For a non profit You can't have money left over in the bank account. So you gotta figure out what to do with it. It's not necessary that they keep all the money and pay bigger salaries to themselves. It's possible that they hire more workers. It's possible that they give back more to the cause they are meant to support.

But also, it's up to them to decide. The only restriction is that they can't have leftover revenue [00:02:00] and also they have to meet some criteria. So the IRS has to grant you that status and you can do many things like you can be a research nonprofit, you can help poverty, you can help animals. There's actually a lot of different types of nonprofits later in this video, we're actually going to go over them, but for now you just have to understand that it's not something that you just say you actually have to meet some specific criteria.

Yeah. And. A lot of times, first time entrepreneurs especially, they want to open a business that gives back to the community, that does something good. And they think to do that is through a non profit. But there's a little bit of a myth in there, because you can always make profits when you pay yourself and still support whatever cause you want.

It doesn't have to be through a non profit. You only should be a non profit if you specifically and deliberately meet the criteria that the IRS outlines for the non profits. And there's differences in how non profits versus for profits generate investment or income. [00:03:00] Obviously, they all can take revenue by selling things, but also, non profits are more likely to get grants and donations.

There's even a specific type of non profit, a charitable trust, which is meant to get donations because donors just get breaks by donating to charitable trusts. And there's a big national budget for charity donations. Now, there's actually a lot of different types of non profit. I'm actually going to show you a list of all of them.

This is a page on upcouncil. com. Upcouncil is like a freelance site for lawyers. You can think of it that way. I'm not trying to promote the site, but they did have a fantastic resource where they outlined all the possible non profits, like charitable organizations, foundations, professional associations.

Recreational clubs, fraternities, and so on and so on. And there's a lot of them and they got all of them in this list. I'll have the link to it in the resources of this video. I recommend you go [00:04:00] through this list and see, do any of these. Options sound like your situation, and that might give you a sense if you're fit to be a non profit.

If not, it's totally fine. You can still be a for profit and still do amazing things for whatever you want to benefit. So hopefully now you understand the difference between a for profit and a non profit, how non profits differ, and you'll be able to tell whether you really are a fit to be a non profit.

