The difference between nonprofit and for-profit business

April 25, 2022 – DENTON – We are seeing a trend in women wanting to start a nonprofit vs. a business—without really knowing the difference between the two. Every grant program we have is open to woman-owned businesses in Texas, whether they are a sole proprietor, partnership, corporation or any other for-profit entity.  Nonprofits are excluded and we get at least one request from each grant program asking why.

The Center for Women Entrepreneurs follows the guidelines of the Small Business Administration (SBA) in defining a woman-owned business. The SBA’s Code of Federal Regulations (CFR) Title 13 part 121 clearly states that “a business concern must be organized for profit to meet the definition of a small business,” and that a “501(c)(3) is not organized for profit and as such does not qualify as a small business.”

A nonprofit qualifies for tax-exempt status by the IRS and is organized for some type of social good.  These entities do not have an owner and are led by a board of directors, trustees or committee members. A nonprofit cannot be passed down to the next generation nor can it be woman-, minority- or veteran- owned, as no one owns it.

Funding for nonprofits typically come through grants and donations. Many need a full-time grant writer to help keep them funded for their mission. Financial struggles are common for a nonprofit and they often depend on volunteers as resources. 

An owner of a for-profit business will find it difficult to get financing in the early years as most small businesses fail, making access to capital difficult. Historically, grants were only for nonprofits but more have been available in the last decade. Any profits earned remain with the owner and they have the ability to sell the business.

Taxes and financial reporting is different between a tax-exempt nonprofit and a for-profit enterprise. The IRS has many resources to help both navigate these differences. Speaking with an accountant and a lawyer before starting either one of these ventures should help with understanding the complexities of each and determine which one would meet your purpose and goals for the entity.

The Texas Secretary of State (SOS) website is also a great resource to check when starting a for-profit business and learning about the different entities. The SOS site also has information for a nonprofit and the IRS website has information about becoming a 501(c)(3) tax-exempt organization.   

Our small business advisor is available to work with women that want to talk about the different types of entities, or learn more on how to start up or grow a business. You can register for our services at https://twu.ecenterdirect.com/signup.

Tracy Irby is the director for the Center for Women Entrepreneurs at Texas Woman’s University. She can be reached at tirby@twu.edu. The center is a program of the Jane Nelson Institute for Women’s Leadership, which is dedicated to preparing more women to take on successful roles in business and public service.

Article first published in the Denton Record-Chronicle.