Costs of Business: What Are They?
What Do Industries Choose?
The question of why some industries steer towards nonprofits and some industries towards for-profits is an interesting one, for sure. I believe that there are several reasons in particular. I further believe that there is currently a blurring of the lines between for-profits and nonprofits, meaning many share similar characteristics and it is sometimes difficult to discern which businesses are which. This blog post highlights the possible reasons why industries opt for being nonprofits or for-profits, outlining ways in which the two are not that different after all.
What’s the Difference?
Perhaps most obvious is the fact that nonprofits are mission-driven. So certain industries that are incorporated to address an inequity or societal problem would be more likely to incorporate as a nonprofit. Examples include behavioral health care, substance use, and homeless services. The goal of these nonprofit organizations is to provide services to benefit the larger community, using the majority of the incoming funding to do so. Nonprofits do not keep any incoming money as a profit, but rather reinvest the funds into services or programs (Jane, 2021). Yet, this does not stop nonprofits from generating a profit. Indeed, one of the area’s largest behavioral health agencies has a budget of over $100M, and it uses these profits to benefit staff as well as clients.
For-profit businesses, on the other hand, are expressly established to generate profit for shareholders. For example, Embrace Innovations, which has both for-profit and nonprofit arms, uses the for-profit for the capital-intensive aspects of the work, including research and development. The for-profit arm also “sets up the sales and distribution infrastructure to sell the company’s product to those who could afford to pay for it, while still focusing on the bottom of the pyramid markets” (Chen, 2013). Embrace Innovations is laser-focused on generating profit, which suits the manufacturing and research and development activities. However, much like many present businesses, it understands the utility in owning both a for-profit and a nonprofit. These social enterprises constitute, to my mind, a blurring of the lines.
What Are Social Enterprises?
Social enterprises enjoy the benefits of both types of businesses.
“The fundamental difference between a for-profit and a nonprofit organization is where it can source capital. A for-profit can raise money from private investors, for which it must give equity or dividends to shareholders; ultimately, a return on investment is expected. A nonprofit, on the other hand, can seek donations from individuals, foundations, and corporations. Such stakeholders generally expect a “social return” on capital” (Chen, 2013).
I happen to own a for-profit business and am the president of my nonprofit charitable foundation. My business model is to generate revenue through my grant-writing activities which are then used to support the charitable giving that I do. My companies also have very similar names—CommonWealth GrantWorks and CommonWealth GrantWorks Foundation, Inc. Although there is a firewall between the two businesses, I aspire to turn “profit” through the nonprofit as well, returning it to the charitable giving coffers, permitting greater giving and larger grants to individuals. Nonetheless, in this way, I intend to generate “profit” through the nonprofit.
Who Turns a Profit?
I believe that industries steer towards nonprofit and for-profit models based on several factors, including purpose, profit-making aspirations, and owner aspirations. I also believe that there are ways in which for-profits and nonprofits are similar, such as with the desire to make a profit, regardless of how those funds are ultimately used.
And if we can help you better understand your profit position, please contact us today.