Spot the Difference: Nonprofits Versus For-Profits

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The follow blog is by Jay Haapala

Whether you’re in the nonprofit sector because it’s your career goal or because you stumbled into it, congratulations and welcome. In my experience, the differences between working in a nonprofit or a for-profit are sometimes misunderstood, if not misrepresented. Being able to recognize and articulate the differences between sectors is a vital skill. Let me take a moment to map them out for you.

Key differences between nonprofits and for-profits:

Reinvestment vs. Dividends—Nonprofits must reinvest their revenue into the organization, even if their profit exceeds the budget. For-profits can pay their investors in dividends.
Tax-Free Operation—There is a heavy incentive for nonprofits to operate as 501(c)(3) organizations—no taxes!
Shares vs. Chairs—Nonprofits and for-profits are both actually corporations, which means that their stockholders, directors, and officers are not personally liable for the company’s debts in the way a sole proprietor is. Both are directed by boards, but in a for-profit, voting rights are determined by the number of shares one holds. In a nonprofit, voting rights are delegated to each chair of the board.
Quarterly Earnings vs. Mission-Related Outcomes—For-profits seek to make money for their shareholders. Nonprofits seek to generate mission-related outcomes for their stakeholders.
Resource Constraints—Nonprofits work with fixed resources and focus on top priorities. For-profits can invest in opportunities to gain market share and profit.
Benefits—In general, nonprofit professionals enjoy more flexible work schedules and have more access to professional development opportunities. For-profit employees get paid more.

The line between working in a nonprofit or a for-profit is blurry, and that’s a big reason for common misconceptions. Let’s set some facts straight.

Positions that exist in for-profits don’t exist in nonprofits.

Some sources* suggest that wage surveys are skewed. Let’s say a nonprofit CEO makes $200,000 a year and oversees an operation of 100 staff and a $5 million budget. At a for-profit, an employee with a similar salary and staff and budget responsibilities may have the title of marketing director instead of CEO. According to the Standard Occupational Classifications system used by the Bureau of Labor Statistics to compare nonprofit and for-profit salaries, marketing directors in each sector are compared even though their level of responsibility varies to a high degree.

Nonprofit employees earn just as much in wages as for-profit employees.

According to the most recent Minnesota Nonprofit Economy Report, the average weekly wages for for-profit employees in 2009 were $879. The average weekly wages for nonprofit employees in 2009 were $870. That about sums things up.

Some for-profits offer the pros of nonprofits

Plenty of for-profits provide flexible work schedules and professional development, not to mention the socially responsible practices of many for-profits. A lot of my friends who work for for-profits are very proud of the work they’re doing. It’s no harder to find a socially responsible for-profit than a money seeking nonprofit.

Key similarities between the two sectors:

Market Niche—Whether your organization is a for-profit or nonprofit, it must serve a particular market of customers, clients, patients, visitors, members, etc. If your clients don’t need or get value from the product or service you provide, your organization won’t be successful.
Accountability to Stakeholders and Stockholders—Both nonprofits and for-profits must be accountable. Whereas nonprofits depend on the support of their stakeholders, for-profits must prove their continued profitability to stockholders.

If your nonprofit provides value to your market niche and demonstrates outcomes to your stakeholders, you’ll stay in business. Similarly, if you make yourself necessary to your coworkers, external partners and clients and communicate well about your own impact, you’ll remain valuable to your organization.

Many of us working in the nonprofit sector are here because we care about a specific issue or because we want to work toward the common good in general. As often as our passion and idealism leads us to accomplish great things, it can make us blind to the wider operating environment. Let your passion find a market niche and let your idealism drive you to demonstrate accountability.

What other misconceptions about the differences between the nonprofit and for-profit sectors have you encountered?

*Sources

Christopher J. Ruhm and Carey Borkoski, "Compensation in the Nonprofit Sector," The Journal of Human Resources, autumn 2003, pp. 992-1021
Laura Leete, "Whither the Nonprofit Wage Differential? Estimates from the 1990 Census," Journal of Labor Economics, January 2001, pp. 136-170
Amy Butler of the Bureau of Labor Statistics, Wages in the Nonprofit Sector: Management, Professional, and Administrative Support Occupations, October 2008 http://www.bls.gov/opub/cwc/cm20081022ar01p1.htm#8