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Should Your Small Business Be For-Profit or Nonprofit?

Do you want your small business to operate as a nonprofit or for-profit? It’s a huge decision. Start by asking yourself about your goals for your business. Is your main to make money? Then you should start a for-profit business. But if you want your business to donate profits and services to the public, consider starting a nonprofit business. Nonprofit businesses typically have a detailed purpose that focuses on benefiting society rather than making money for owners or stockholders. Unlike for-profit businesses, nonprofit companies do not share any profits with owners or shareholders.

What the Pluses and Minuses of a Nonprofit Business?

Nonprofit businesses use any surplus of money to serve and enrich the community, instead of the owners and executives. This can be both an advantage and a disadvantage for your small business. Securing investors without the incentive of earning a consistent profit may make it hard to obtain multiple investors. Instead, look for funding from donations, grants, and sponsorships. In contrast, your for-profit business would receive funding from loans, investors, and revenue from sales.

One disadvantage of a for-profit business is the amount of paperwork required. For-profit businesses must complete detailed balance sheets and income statements regularly to confirm profitability. Nonprofits must create a Statement of Financial Position to outline their assets and a Statement of Activities to show total revenue after expenses.

But nonprofits have their disadvantages, too. One common disadvantage involves public scrutiny. How will you feel if your nonprofit receives criticism for how well you handle administrative expenses and how well you use income to help your business complete its mission. And how do you define success and raise money to keep going? The success of for-profit businesses is based on how much money the business makes for owners and founders, whether shares of the company are privately held or publicly traded. For your nonprofit business, generating enough revenue to be stay afloat can be difficult at first. You must find ways to ensure your revenue is consistently more than your expenses while serving the public. Aside from performing your mission, the success of your nonprofit business stems from the satisfaction you receive from serving a noble cause.

What’s Involved in Starting a Nonprofit Business?

The steps to start a nonprofit business or a for-profit business are similar. You have to create a great idea, produce a business plan, and secure funding. To start a nonprofit business, you also have to develop a solid mission, incorporate the organization, and file for tax exemptions. Unlike for-profit businesses, the mission for your nonprofit is extremely important to the success of your small business. The mission helps influence public opinion and draws in potential donors. Nonprofit businesses must track all revenue sources to maintain the business’s accountability. Your small business must prove consistently that all revenue the organization generates is used solely to fulfill the company’s mission.

You also need to establish clear leadership in your business, but it looks different in a for-profit versus a nonprofit. Leadership in for-profit businesses is typically clear-cut. Leadership responsibilities are broken up between the owners, executives, and shareholders. Leadership in a nonprofit centres in a board of directors that navigates the future of the company without holding any direct financial ownership.

How Does a Nonprofit Get Tax Exemptions?

For your nonprofit to receive tax exemptions in Canada, you must meet certain eligibility requirements. To receive a tax exemption, your business must be operated for a purpose that is not profit-related. It has to be organized and operated for a listed purpose, such as social welfare or civic improvement. Under Canada’s Income Tax Act, nonprofit business only pay taxes on certain property income, and these businesses are required to file tax and information returns on specific sources of income including contributions and restricted contributions.

What Are the Differences in Accounting for Expenses and Costs?

Although some costs and expenses for nonprofit and for-profit businesses are similar, nonprofit businesses may have a set of different expenses in addition. For-profit and nonprofit businesses both have general operating costs that include rent, utilities, and equipment. A nonprofit business often has additional program service expenses, management expenses, and fundraising expenses. The program service expenses typically make up the bulk of nonprofit expenses. These consist of any costs needed to help your small business perform its mission. Fundraising expenses are important to nonprofit businesses. These expenses — which may include fundraising events and salaries for fundraising employees — are necessary to keep your enterprise alive.

What are your goals as a business owner? The decision as to whether your small business should be nonprofit or for-profit turns on these goals. Nonprofit businesses plan to serve the community by providing a public service, while for-profit business operate to make money. Both businesses have advantages and disadvantages. Your final choice depends on your interests, your overall goals, and your specific intent regarding what you want your business to accomplish. The reward a for-profit business offers is the income the business generates for owners and executives, but the satisfaction of helping society with your nonprofit can be rewarding as well.

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