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NONPROFIT AND FOR-PROFIT CORPORATIONS

Modern societies are organized into local and national or federal governmental entities that are primarily funded by taxpayers' money in order to provide public services to citizens and residents. Consequently, governmental entities are owned by the taxpayers. These entities do not pay taxes, because their revenue comes from taxes.

On the other hand, individuals in society, especially in capitalist societies, can use their money to engage in entrepreneurial activities by creating businesses. Usually, businesses take several forms, such as a sole proprietorship (owned by one single individual), partnership (usually owned by two or more partner investors), or corporation defined by a U.S. Supreme Court decision as "an artificial being, invisible, intangible, and existing only in the contemplation of the law" (Schneeman, 1997, p. 159) A corporation is an entity separated from its owners or managers. It is liable for any debts and obligations. The requirements necessary to start a corporation vary from one state to another in the United States and from one country to another throughout the world.

A corporation can be for profit or not for profit, as indicated previously. A for-profit corporation is organized by a group of owners (or equity holders or shareholders) in order to generate profit (net earnings) that can be distributed to shareholders in the form of dividends. A for-profit corporation pays federal taxes. The dividends are also taxable wealth. This is what is called the principle of double taxation: The corporation is taxed as an entity, and the individual shareholder is taxed when the dividend is received.

Contrary to a for-profit corporation, a nonprofit corporation is organized to provide community services that a government agency would have had to provide and that a for-profit corporation may have no interest in providing (Box 1.1). As a result, nonprofit corporations are exempt from taxation. A nonprofit corporation has no owner, but it is controlled by the members and a board. Unlike a for-profit corporation, a nonprofit corporation cannot distribute profit to those who control and/or financially support it. The profit generated by a nonprofit organization must go to bettering services, motivating staff, upgrading equipment, providing staff training, and implementing other activities to further the vision and mission of such organizations.

Sometimes it can be difficult to distinguish a for-profit corporation from a nonprofit corporation just based on the services provided. A corporation may provide a service that looks like a nonprofit activity, but is nevertheless a for-profit business entity. For example, let us consider a fictitious corporation called Loving Companion Care, Inc. (LCC), which is owned by a group of registered nurses and is located in Appleton, Wisconsin. The mission of LCC is to provide quality companion care to elderly individuals in Appleton. Despite the financial crisis, LCC has done well. In fact, LCC has been making regular contributions to cultural events organized by some civic associations. The LCC's shareholders were very

Comparison

Government Agency

Nonprofit Corporation

For-Profit Corporation

Purpose

Provides public services to members of a society.

Provides community services.

Exists to generate profit for shareholders or owners.

Ownership

Owned by tax payers.

Does not have owners, but is controlled by members and board.

Owned by

shareholders; ownership is transferable.

Profit

Belongs to tax payers.

Used to support activities and expand the organization's mission.

Distributed to shareholders as dividends.

Taxation

Tax exempt.

Tax exempt.

Double taxation.

happy with the dividends they received at the end of the fiscal year. Would you say that LLC is a nonprofit corporation, a for-profit corporation, a sole proprietorship, or none of the above? Yes, LCC provides an important community service. Also, LCC contributes to cultural events in its community. However, LCC belongs to a group of nurses and distributes dividends to its shareholders. A corporation that belongs to a group of individuals and distributes dividends to shareholders cannot be a nonprofit organization. A nonprofit organization belongs to the public, because it receives public financial support through tax exemption and various donations. The members or board members of a nonprofit corporation act on behalf of the community.

 
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