For-profit and not-for-profit organizations have one major difference: a for-profit runs with the intention of turning a profit, while a not-for-profit doesn’t. Aside from that element, these organizations are very similar; depending on the type of business you plan to start, you may be able to operate it as for-profit or nonprofit. To make your decision, you should consider the nuanced differences between these two options.
Do You Have the Right Scope?
In Canada, nonprofit organizations operate for the social welfare. That may include civic improvement, pleasure, and recreation. Charities are also not-for-profit, but forming a charity involves additional registration steps. Charities focus on relieving poverty, advancing education, and other beneficial community purposes. To explain, if you’re starting a youth soccer league, you could opt to make it for-profit or nonprofit. Similarly, if you’re opening a tutoring centre for illiterate adults, you could also choose between for-profit or a nonprofit, but in this case, you could take the additional step of registering your nonprofit organization as a charity. Some business ideas simply don’t work as nonprofits or charities; if your idea is outside of this scope, for-profit may be the only option.
Should the Organization Pay Taxes?
Nonprofit organizations and charities are exempt from taxes. In some cases, nonprofits have to pay taxes on capital gains, but registered charities are completely exempt. Because of this, when the organization earns extra money, you can put that money directly back into your mission. In contrast, the Canada Revenue Agency taxes all of the earnings of for-profit corporations and businesses.
What Earning Potential Do You Want?
If you start a for-profit organization, there is no legal limit on the amount of profits you can earn. In contrast, with a nonprofit, the organization doesn’t earn profits, but you can certainly pay yourself a salary. The salary should be commensurate with your skills and comparable to the market rate for that type work. That said, there are no laws limiting how much charity or nonprofit exeucitves can earn, and the managers of many of the country’s top charities make well into the six figures. The income you pay yourself from your charity is subject to personal income tax. If you’re okay with a salary, a nonprofit structure may make sense, but if you want unlimited earning potential, a for-profit business is the better option.
Do You Want to Share Control?
You can run a for-profit organization as a sole proprietor and make all the decisions yourself. If you crave ultimate control over your vision, you may prefer this structure. Generally, with a nonprofit, you need to share control of the organization. A board of directors or an advisory council helps guide the organization and lends legitimacy to your efforts. At the end of the day, you can make the world a better place with a for-profit business or a nonprofit organization. There are advantages and disadvantages to each option. You just need to look at the particulars and decide what works best for your situation.