The biggest difference between a benefit corporation and a nonprofit organization is that the benefit corporation is a for-profit corporation and the nonprofit is a not-for-profit corporation.
What this means is that no individual within a nonprofit is legally allowed to profit from dividends and additional money left over at the end of the fiscal year after all expenses have been covered. At the end of a fiscal year, if a corporation had dividends or additional leftover profits after all expenses have been taken care of, it can be distributed among shareholders as a profit. This is not an option for nonprofits, who do not have shareholders, and whose profit must go towards the purpose for which the organization was formed. Also, a benefit corporation can declare that total shareholder profit is not their primary goal. They can declare certain profit sacrifices in order to instead benefit the environment or society in some way.
The primary difference here is in the fact that a benefit corporation has a charitable or socially conscious purpose that it makes provision for in its budget.
So a benefit corporation was formed and exists to make a profit for its shareholders, and operate in the way that a regular corporation does. They do, however, follow a few additional guidelines:
- Benefit corporations issue annual transparency reports.
- Benefit corporation commit to operating in a sustainable fashion.
- Benefit corporations stay accountable to shareholders and others involved with the corporation.
A nonprofit board of directors has a legal responsibility to uphold the mission statement of the nonprofit. This is true for benefit corporations as well, but they are for-profit corporations, which means directors have a legal responsibility to make decisions to make profits for the shareholders. A benefit corporation can add in certain ideas and principals that will not maximize profit, but further the cause, thus protecting its board of directors from being personally liable to the shareholders for not making the maximum profit they are capable of making. This can complicate the role and balance of social goals versus profit goals. A nonprofit director will have the duty of managing the funds appropriately and responsibly, but its first priority is the nonprofit’s main purpose.
Capitalization and funding
A nonprofit, which is often classified as a charity, can receive funding and capitalization any number of ways, including public donation, government grants, and fundraising. To do so, a nonprofit must register with the state attorney general or similar government office as a charity so that they can legally solicit donations and fundraise. Mutual benefit nonprofits receive money from membership dues and other contributions from their members. Benefit corporations, on the other hand, because they are a for-profit corporation, get initially funded and capitalized just the same as a normal corporation. Shareholders capitalize the benefit corporation in exchange for shares of stock in the benefit corporation (which is the same process as a regular corporation). Benefit corporations distribute profits in the form of dividends as well as apply for business loans and are attractive to outside investors because they are a simple corporation, where a nonprofit includes a lot more paperwork and regulation, and thus is not as attractive to investors.
A majority of nonprofits pay taxes like a normal corporation would unless they are eligible for and choose to obtain 501c3 tax exempt status from the IRS. Without 501c3 tax status a nonprofit pays corporate tax rates
jus the same as a Fortune 500 Public Company. Tax-exempt status often allows nonprofit organizations (with the exception of mutual benefit nonprofits) to obtain further local and state tax exemptions as well. Benefit corporations, on the other hand, get no special tax advantage. While they have a specified purpose that they support and certain business practices they subscribe to, this does not enable a benefit corporation to be tax-exempt because of its overall goal to make a profit for its shareholders.
The bottom line
While both aim to essentially do good in the community and the world, the primary differing factor between benefit corporations and nonprofit organizations is that, while both are corporations, and both aim to do good, the benefit corporation will make a profit at the end of the day, and the nonprofit will put any profit back into its cause.
Basic Income Structure
Income based on donations, membership fees, and/or sales of products/services directly related to non-profit mission. Founders cannot profit personally.
Business structure requires the sale of a product or service.
Grants, fundraising efforts.
Can be funded by investors, business loans, and all other common funding sources.
Tax-exemption possibilities. Otherwise, taxed as a C corp.
Can elect to be taxed as a C corp or an S corp.
Regular W-2 wages. Can be salaried or paid hourly.
Regular W-2 wages. Can be salaried or paid hourly.
Are you interested in starting a non-profit organization or a benefit corporation, but unsure where to begin? Get free, small business advice from a SCORE mentor today.