If Not-for-profit, What For Then?

[Bernie]

First, you need to understand what "non profit" actually means. As far as legal and tax implications go, "non profit" simply means that at the end of the fiscal year, there is intentianally no money left over as profit. In some instances, it also means that you are trying to provide some sort of good in the world. "Non profit" does not indicate where the money actually went. Here's a hypothetical example: say I start an organization to help provide corrective footware for dogs. I take in ten million dollars in donations over the year. I use one million of it to buy the doggie footwear, and then spend eight million providing myself a plush office, company car, expense account, etc., plus pay myself one million dollars in wages. At the end of the year, all of the money is spent and I can claim "non profit" status. I don't sell stock, I don't pay investors, so I am "non profit." Of course, I got to live a pretty sweet lifstyle and pay myself quite well, but the money was all spent on organization-related expenses, so I am "non profit." If I have partners, then as long as we all "work" for the organization, we can all enjoy the wealth and still be considered "non profit." So there you go, now you see who potentially benefits. This is exactly why you have to be VERY careful before donating to any charity. Just because they are "non profit," doesn't mean they are worthy of your donation. Always research an organization very well before giving them any of your hard-earned money. There are many very good charities out there, but there are a lot of bad ones too.

[Murtaugh]

...these objectives in a for-profit company may include the usual maximization of Profit=Revenues-Expenses and/or the maximization of shareholder value.   A nonprofit company means it shoots to set its revenues/pricing to cover its budgeted expenses--nothing more complicated than that. There can be tax advantages to this form of corporate organization and there can be less regulatory scrutiny.   Not all nonprofits are charitable organizations that "do good in the world". Some are fiercely competitive businesses that just choose to organize themselves that way.  I worked in one for almost 10 years.  Trust me, it was not much different than working in a Fortune 500 corporation or bank. It was a bankcard association.  The nonprofit pays taxes on its profits, so as crazy as it may sound to the novice, the company absolutely does not want to make a profit, unless it is doing some creative tax accounting. The art and science is in the budgeting process.  The company maps out its plans and carefully budgets what it will take to achieve them.  Then it sets its pricing/fees/donation targets/etc. to cover these costs.  If its financial planning is poor and the company makes a big profit, the CFO probably gets a low/no bonus that year.   So, what does a nonprofit manage to if it is not seeking to maximize profits?   From a financial standpoint, as I indicated above, it is definitely managing to its carefully developed budget.  From a business standpoint, depending upon what the business is, it could be trying to maximize the profitability of its members.  Remember, many member associations are nonprofits.  These could be associations of tiddly winks players or they could be associations of megabanks or insurance companies, etc.  In addition to member institution profitability, the association could be managing to maximize the market share of its brand.  Some large associations are essentially franchises and have that mandate.   As for who benefits, hopefully the nonprofit benefits its members--or, if it is a charitable organization, the beneficiaries of the focused charity. For charities, it is important to watch its administrative ratio.  Afterall, when people make charitable donations to an organization focused on helping refugees from the genocide in Darfur, they want as many of their dollars going to the refugees, not paying for lavish headquarters or excessive executive compensation. These ratios are published.  For the example I used, if you look them up, you will find charities like Americares and the International Rescue Committee highly efficient--meaning a very high percentage of contributions goes to programs, not administrative expenses.  Other organizations, which I will not name, which endeavor to help the same people in Darfur, do so much less efficiently.  You would contribute to those organizations, which might include some religious institutions, if you also had a strong affiliation with that organization for other reasons.  If you didn't have a strong affiliation with that less efficient charity, you would be wasting some of your hard earned charitable donation on an inefficient management team.   Hope this helps.