The main difference between commercial organizations and nonprofits is the following: the former work for profit, and the latter set themselves certain social goals. In a nonprofit organization, profits should go in the direction of the goal for which it was created. Members of such an organization do not have any legal rights to dividends, unlike a commercial company. To find out how a commercial organization differs from a nonprofit, you should first familiarize yourself with these concepts in more detail.
Definition of a Commercial Organization
The main objective of a commercial organization is to profit from regular operations in order to maximize the owners' cash. The profit earned by such organizations is used to develop the business or is stored in the form of reserves, or is distributed among the owners as dividends.
Businesses seek to minimize costs and maximize revenue to maximize profits, grow and expand their business. They need to keep ledgers for tax and audit purposes; tax is levied on business profits at a fixed rate.
Definition of Nonprofit Organization
A nonprofit organization, as the name implies, is a legal organization whose main purpose is to maximize the public good, not profit. According to 7 Federal Law “On Non-Profit Organizations”, a non-profit organization is an organization whose main purpose is not to profit from the main activity and distribute it among the participants. Such organizations are founded by a group of people who gather to achieve a common goal, that is, the provision of services to members of society.
These include: sports clubs, state hospitals, religious institutions, cooperative societies, and many others. Nonprofit organizations also make a profit, but the profit made by them is used to advance the organization’s goals. They collect funds from subscription, donation, government grant, membership fee, entry fee, inheritance, charity and so on.
The similarity between nonprofit and commercial organizations
Both commercial and non-profit organizations have goals and objectives that are clearly defined. Their products or services are known to everyone.
A nonprofit organization must meet the goals and needs of interested parties, just like a commercial one.
Commercial and non-profit organizations have limited resources, as well as goals that must be covered by limited funds.
Both commercial and non-profit organizations create such a management system that ensures the efficient operation of the organization.
What is the difference between a commercial organization and a nonprofit?
One of the main myths regarding a nonprofit organization is that it does not profit from business activity. A non-profit organization also makes profit from various types of activities, as a commercial organization does, but only the method of processing profit is different.
The main difference between a commercial organization and a non-profit organization is the purpose of the work. A commercial organization works for profit, while the goal of a nonprofit is primarily to serve society. The table below provides a comprehensive description of commercial and non-profit organizations.
The basis for comparison
A legal entity that works for profit for the owner is called a commercial organization.
A non-profit organization is a legal entity that acts for the benefit of society as a whole.
purpose of work
Making a profit.
Sole, partner or corporate property.
Consumer cooperative, public and religious organizations, foundations, institutions.
One or more owners.
Trustees, committee or governing body.
Source of income
Sale of goods and provision of services.
Donation, subscription, membership fee and so on.
Capital contributed by the owners.
Funds from donations, subscriptions, state grants and so on.
Profit and loss statement, balance sheet and cash flow statement.
Balance sheet, report on financial results and intended use of funds.
The main difference between a commercial organization and a non-profit organization is the purpose of the work. Commercial organizations, as mentioned earlier, have one goal - making a profit and all that is connected with it:
- The receipt of income by the owner or owners of the organization.
- Ensuring stable and smooth operation of the organization.
- Ensuring the stable development of the organization.
- Conquest of the market or its specific part.
- The increase in the effectiveness of the organization.
- Increasing labor productivity.
- Improving the quality of the goods or services offered.
- Prevention of failures in the organization, and so on.
Nonprofit organizations exist primarily to provide assistance or resources to a targeted audience with a specific need. Thus, the main objectives of the nonprofit organization include:
- Strategic. The strategic goals of the nonprofit organization are focused on the services provided in the target market. Typically, these include identifying the needs of the community concerned and developing programs and projects to address those needs.
- Financial. Non-profit organizations must generate sufficient income to cover expenses and pay taxes (usually through a simplified taxation system). Financial goals include raising enough funds to finance activities included in the strategic plan, as well as to cover fixed costs, such as renting premises, paying staff and utilities. The main objectives are break-even and maximum cash flow.
- Operational. The operational goals of a nonprofit organization are related to the management of funds and resources to solve specific problems. They include the completion of individual projects and programs in short lines, the search for necessary resources and other goals.
- Management objectives. Nonprofits are subject to stringent management requirements, mainly because they typically use donations or grant funds to do their job. Management objectives include developing sound policies in areas such as procurement of resources, organizing events, managing human resources and volunteers, and managing assets and risks.
- The objectives of the partnership. Partnerships are vital aspects of nonprofit management. For example, a nonprofit organization usually does not have enough money to advertise, so a partnership with a local newspaper can benefit both parties. A non-profit organization receives free advertising, and the newspaper receives recognition as a supporter of the organization.
Forms of ownership of commercial organizations
One of the main differences between commercial organizations and nonprofits is the form of ownership. Individuals and legal entities may own interest or shares in a commercial company. The owner’s share or percentage of ownership is recorded in the company's accounting system and may increase or decrease over time. Owners of this type of organization have the right to benefit from the activities of the company by receiving dividends or shares, with the possibility of sale. A commercial organization may exist in the following forms:
- Full partnership.
- Limited partnership.
- Limited liability company.
- Society with additional responsibility.
- Subsidiaries and dependent societies.
- Production cooperatives.
- Joint-stock company.
- Unitary enterprises.
Nonprofit ownership forms
A nonprofit organization does not belong to anyone. You can establish an organization or sit on the board of directors, but you do not own any stake in the company. According to 7 Federal Law "On Non-Profit Organizations", there are such forms:
- Public and religious organizations (associations).
- Nonprofit Partnerships.
- Private institutions.
- Autonomous non-profit organizations.
- Associations (unions).
Capitalization and financing
A nonprofit organization that is often classified as a charitable organization can receive funding and capitalization in any number of ways, including government donation, government grants, and fundraising. For this, a non-profit organization must register in order to be able to legally request donations and fundraising.
A commercial organization mainly operates with contributions from shareholders. The shareholders of a commercial enterprise have shares for a certain amount, the price of which may vary depending on the efficiency of the enterprise. Such companies distribute profits in the form of dividends between shareholders.
Differences between Nonprofit Organization and Charity
Registered charities are often referred to as nonprofits. Both non-profit and charitable organizations can work on a non-profit basis. But nonprofits should not act solely for charitable purposes: they can work in the interests of social security, civil welfare, sports and so on.
Signs of a commercial and nonprofit organization
The differences between them are clearly defined:
- A commercial organization is defined as a legal organization that works for the sole purpose of making a profit from entrepreneurial activity. On the other hand, a nonprofit organization exists for the main purpose: to benefit society as a whole.
- A profitable organization, as the name suggests, works to maximize profits; non-profit works to provide services, to improve the welfare of society. This is the main features of a commercial and non-profit organization.
- A nonprofit organization is managed by a board of directors, trustees, committee, or governing bodies. Commercial management is carried out by the owner, group of owners or directorate.
- Legal forms of commercial and non-profit organizations are as follows. A profitable organization may be sole, partner or corporate property; non-profit - by a public organization, foundation, club, and so on.
- The main source of income for a nonprofit organization is the sale of goods and services. She receives a significant part of her income from donations, subscriptions, membership dues, charity and other sources.
- When it comes to starting an enterprise, the owners manage the amount in the form of seed capital contributed by them all. In a non-profit organization, funds are collected to start activities in the form of a contribution through donation, inheritance, subscription, etc.
The article presented the main differences between commercial and non-profit organizations.