The Entrepreneur’s Guide to Organizational Structures
Whether you want to introduce an innovative new product or provide a service to your community, starting a business can be a solid first step. But how do you decide whether to form a for-profit, non-profit, not-for-profit, or cooperative business? While the terms sound similar, there are several major differences. Origin Bank is here to help you determine which structure is right for your new venture.
For-profit businesses
From mom-and-pop shops to big-box stores, most businesses fall under the for-profit umbrella. The goal of a for-profit business is to make money by selling a product or service to customers. This also allows you to pay dividends to investors, shareholders, or other leaders invested in the business.
For-profit companies are focused on optimizing sales and revenue to meet financial goals. Once they identify the target audience for their product or service, they devote their advertising budget and resources to marketing to that segment. Unlike non-profits, for-profit businesses are required to pay state and federal taxes on their profits.
Non-profit organizations
Unlike for-profit businesses, which exist to make money for owners and investors, non-profits are not owned by anyone. Instead, their primary goal is serving the public good, operating in sectors like education, healthcare, environmental conservation, and the arts. Hospitals, charities, and universities can all be considered non-profits.
In contrast to for-profit businesses that pay state and federal taxes on their profits, nonprofits are granted tax-exempt status under section 501(c)(3) by the Internal Revenue Service (IRS). This allows them to receive tax-deductible donations from community members and foundations. However, this designation also means a non-profit’s activities are more restricted, and all activities must further their charitable, educational, or other mission.
Since there are no owners or shareholders, non-profit organizations are overseen by a board of directors or trustees. Most of these leaders are volunteers rather than employees, and do not receive payment for their services. This means any profits or extra funds are reinvested back into the non-profit to further its mission. While non-profits do have employees, those salaries are considered part of the operating cost of the organization and are not based on fundraising efforts.
While non-profits operate as businesses in terms of generating revenue, their commitment to serving the public good means they are accountable to the public rather than shareholders.
Not-for-profit organizations
Much like a non-profit, a not-for-profit organization doesn’t generate profit for a group of owners. Instead, the revenue goes back into the organization to help fulfill the group’s objectives.
Many not-for-profits, such as social welfare or labor organizations, are dedicated to meeting community needs. However, unlike a non-profit, a not-for-profit isn’t required to benefit the public good.
Not-for-profits are considered recreational organizations operating without the goal of earning revenue. From sports clubs to business leagues, not-for-profits can also double as social clubs for members. And while these organizations still have to apply for tax-exempt status, the absence of a charitable focus makes it challenging to qualify for 501(c)(3) designation.
Cooperative businesses
Cooperatives are created to provide goods or services to members at a lower cost than for-profit businesses. These members own and control their cooperative, which can be anything from a credit union or housing co-op to a grocery store.
The main purpose of a cooperative is to meet the common needs and interests of its members. Members have equal voting rights, and decisions are made democratically. Cooperatives operate in various industries including agriculture, retail, finance, and housing, aiming to provide benefits like fair prices and improved market access.
By adhering to a set of principles and practices, cooperatives ensure democratic control by members. And while a cooperative does generate revenue by selling goods and services, it doesn’t aim to maximize returns for shareholders. Instead, it distributes profits based on members' participation, turning a profit while also benefiting the community.
Whether you're establishing a for-profit, non-profit, not-for-profit, or cooperative business, the starting point is the same. First, register your business in the state where you plan to work, choosing between options like a corporation, LLC, sole proprietorship, or partnership.
Once your business is official, apply for an Employer Identification Number (EIN) from the IRS. If you're leaning towards running a non-profit or not-for-profit, you can apply for tax-exempt status with the IRS using the applicable form.
No matter which type of business you operate, it takes significant time, research, and support to get it off the ground. Whether you need help creating a business savings account or accessing small business resources, the experts at Origin are here to help. Connect with an Origin Trusted Advisor in your area today!