There should be fewer differences between for-profits and non-profits than you think.
One of the deepest lies about business in the USA has been perpetrated for at least 70 years: “the business of business is business.” The idea is that businesses are for making money—only making money—and any restraints placed on them, legally or socially (and that includes ethically and morally) are attempts to ruin a good thing. If you want to “do good” then go start a non-profit foundation and heal the world—of the very things that businesses have been hurting.
It wasn’t always this way.
In fact, at the start of the United States of America, there was this amazing situation that skewered this defunct concept. If you want the deep history, with all of the associated references, read Gangs of America by Ted Nace. But, the gist of it is this (my reading, of course):
- The American War for Independence was the first Anti-Corporate war.
- The colonists weren’t just “taxed without representation” (a nicely phrased way of saying “at the mercy of”). Many were slaves to corporations and everyone was under the thumb of corporate abuse.
- When the colonist appealed to the King of England at the time, pointing-out that he would never allow this kind of behavior toward his citizens by his chartered corporations in England, he replied that they were correct but that they weren’t his citizens. In short, he didn’t care what the corporations did to the colonists as long as the taxes kept rolling in.
- This left the colonists with only one choice: get out from under corporate rule any way possible. (It should be noted that, until this time, no one wanted to be un-British. This wasn’t an indictment of British culture or rule, but of corporate rule).
- The colonists prevailed, of course, but what did they do about corporations? They had just won their freedom from them so you’d expect them to kick the entire idea of corporations out of the new states. But, that’s not what happened.
- Our Founding Fathers were incredible smart and inventive. They knew that corporations were important as they were organizational structures that could accomplish things that sole proprietorships or even partnerships couldn’t—namely, they protected risk-taking for important, large-scale public works. If you’re in need of a bridge or a dam, a corporate structure affords protection to its shareholders in case it fails.
- Our Founding Fathers’ solution was to continue corporate charters but governed by each state government. Any corporation had to get a charter from the state and needed a reason that would serve society. < This was the key difference from today.
- The only reason to use establish a corporation was to do something that an individual or partnership couldn’t and those were big things. The Founding Fathers basically said “ no big things unless they benefit society.”
That brings us to today. Obviously, we don’t have that situation any longer. In fact, we’re about as far from it as possible. Today, you can establish a corporation in a matter of hours for any reason BUT to serve society. We’ve perverted the entire idea of corporations in the USA such that, in a legal sense, corporations can be sued for having goals other than “make as much profit as possible.” The threat of a shareholder lawsuit rears its head in boardrooms and shareholder meetings all of the time. Tim Cook regularly fends-off questions from shareholders about why they spend some of their profit on renewable energy, subsidizing employee food, funding education initiatives, and other activities that some shareholders view as a waste of their earnings.
Interestingly, when Google offered stock in their IPO, they built much of these protections into the wording in their prospectus so that later shareholders were already forewarned of these goals. it was a smart move and every company should do the same.
In the world directly after the American Revolution, corporations were supposed to exist only to serve society. In today’s world, they are suspect if they try to.
If corporations are supposed to serve society, then why have non-profits at all? Aren’t they, then, the same thing?
Well, they are already the same thing—they’re both corporations. They both play by the same rules (like labor and environmental laws) but with just a few differences, mostly related to capital. For-profits have shareholders, pay taxes (ideally), and can take investment in the form of stock (shares of the corporation). Non-profits have no shareholders (and, therefore, no investment from them), don’t pay taxes, but can take tax-deductible donations and grants from other non-profits.
That’s it. Those are the differences between the two.
If you want bigger differences, you need to look to government agencies, where there are significant differences legally, socially, and otherwise.
Culturally (and culture has shifted a lot over the past 200+ years), there are other differences between for-profits and non-profits. But, these aren’t structural at all. Ideally, all corporations (regardless of profit status) should be well-run, file reports correctly and on time, and have a social mission. In practice, our society has allowed a lot of lax practices in the non-profit side and a lot of myth-generation (many people don’t even realize that non-profits have to earn enough to pay their expenses). Because many non-profits are established by charismatic individuals or for “worthy” causes, much bad behavior is tolerated in service of one or both of these. Also, no one is going to make a “killing” off a non-profit from an investment standpoint (though some have through fraud).
We have this image of a non-profit being well-meaning but poorly-run and even often ineffective. But, large established foundations like Gates and Ford are well-run non-profits, as are many private universities. And, for-profits certainly don’t have a lock on good management practices (or even sustainable revenue models). The NFL was a non-profit until just a few years ago and no one considered it poorly run or scrounging for pennies in order to run.
You’ve likely heard of B-Corps, an organization that certifies companies with a slightly different corporate model. Really, it’s just a normal corporation that has some legal protection to declare that profit isn’t the only thing it takes into consideration when making decisions. Really, small businesses have been doing this since the dawn of time. Companies have refused to do business with people or do nice things for their communities forever, even if it cost them a little profit. Didn’t like that asshole local supplier, you are allowed to buy from the nicer supplier a town or state over, though it might cost you a bit more. As long as you’re not discriminating on the basis of gender, race, sexual identity, etc., it’s A-OK to do and, really, most people would never have a problem with it. In fact, we should be doing more of it.
Stop working for and with assholes!
But, when the corporations get big, as well as their numbers, it’s the shareholders that turn into the assholes. They threaten legal action because their profit isn’t quite what it would be if the company used the awful suppliers and it’s so easy to sit back and criticize (and sue) because the shareholders don’t have to actually deal with the assholes. None of them, of course, would balk at this in their personal lives but once you put it under the “business” category, those complaints seem no longer valid.
This takes us back to that sorry saying: “the business of business is business.” It’s only spouted by assholes who believe that their terrible behavior should be excused in the service of money. You know the like: they advertise on FOX News despite the racism, fascism, and lies promoted therein. The frame for this is that business shouldn’t have a social mission—nor any social goals.
But, if we go back to the very beginning of corporations in the USA, that wasn’t the case, of course. The only reason to get a corporate charter was because you had a social mission!
In your life you will meet these businesspeople (and government representatives with the same wrong-headed ideas). They will tell you that “the business of business is business” and that businesses shouldn’t have any social goals at all. What private individuals want to do with their earnings is their business but a company has no “business” caring about its community, employees, environment, or surrounding society in any way other than to maximize profit. Of course, they’re horribly and inhumanly mistaken and not even true to their own beliefs. And, here’s how you can prove it:
If you run into one of these chumps who declares that businesses have no business caring about social issues, ask them this: “Are you OK with a <insert name of your country here> company selling weapons or other support to an enemy we’re at war with?”
The answer will always be “no” unless they’re the most idiotic flavor of libertarian. If they answer “yes,” then there’s no arguing. Run as fast as you can. They don’t care about their country, their family, or even themselves. There’s a chance you’re talking with one of those “I’m smarter than everyone” debaters who is just answering “yes” for the debate. There’s no point in engaging since they’re just playing games and not being truthful so waste your time or not, as you will.
You’ll nearly always hear “no,” however because who wants to help their enemies!? That’s where you respond: “Great, so we agree that social issues should impact business decisions, we just differ on where to draw the line.” This is both true and deflating—in other words, infuriating to those spouting myths. Checkmate.
So, should you start a non-profit or a for-profit to accomplish what you want to in the world? This is an excellent question. There are a few reasons you might consider a for-profit:
- Easier-to-raise investment (though not easier-to-manage in many cases)
- You’re building something that should be a part of some other, usually larger, company (a feature, not a company). In this case, sell it off when the time is right and bask in the (hopeful) proceeds.
As for the reasons to start a non-profit:
- You want it to be around, working, for a long time (longevity)
- You don’t want it to be easily acquired and its mission perverted or discontinued (“purchase proof”)
That’s it. Calculate tax and pay it for the first category, don’t for the second (and save that 30% or so).
In both cases, you will need a solid revenue model, a great culture, and employee compensation that helps you find and keep excellent people.
Also, in both, you should have a social mission: you should be in business to make something better about the world. This will make it more fun, for longer, and build deeper connections with your customers and constituents. It will likely build deeper, more meaningful, and more stable value, which will make you a more successful, more valuable concern. That good will will also, likely, protect you a bit when things get rough. And, ultimately, you’ll feel better about yourself, your place in the world, and your relation to it and those around you. That’s what you’ll remember most fondly throughout your life.