Why to incorporate a non profit (or ‘not-for profit’ as called in some states) Organization and why not a ‘for-profit’ organization ?
The following constitutes the most important differences between the two.
1) A non profit organization cannot distibute back the profits from its activities as dividends to its board or general members. The profits have to be ‘ploughed back’ into the activites of the non profit orgnization. A ‘for-profit’ organization on the other hand is entitled to apportion the profits generated amongst its constituing members.
2) A non profit organization is constituted for commuity welfare while a ‘for profit’ organization is set up in expectation of personal welfare.
3) A non profit organization cannot have family members/ blood relatives on the board except for in exceptional cisrcumstances and with prior approval and disclosures. A ‘for -profit’ organization can have blood relatives on the board.
4) A non profit organization cannot issue stocks to its constituent members except for in cases of quasi non profit organizations like cooperatives and other hybrid incorporations. A ‘for-profit’ oranization can issue stocks/equity shares amongst its members.
5) A non profit organization cannot use its funds for purposed other than those laid down in its articles of incorporation while a for profit organization can use its fund as per the boards discretion.
6) A non-profit organization is exempted from paying taxes (after obtaning approval from the Federal tax authorities). A ‘for-profit’ organization is generally not exempted from paying taxes on its income.
7)In case of dissolution, A non profit organization cannot distribute the assets of the organization amoongst the members. The assets in this case needs to be transfered to another charitable organization. In case of dissolution of a ‘for-profit’ organization, the assets can be apportioned and distributed amongst its constitent members.
Given these differences,
It is suitable to start a non profit organization, if :-
a) The objectives of the organization are for community benefit
b) The founders are willing to forego individual control over the functioning of the organization in favor of a board.
c) The founders are willing to forego the income generated from the organization.
d) Profitability is a secondary or non motive for the founders.
On the other hand a ‘for profit’ organization is suitable if –
a) Individual Profit making is the prime consideration.
b) The incorprator (and his family members/ close associates) want to retain control over the over all functioning of the organization.