The difference between a commercial organization and a non-profit organization: legal forms, characteristics, main goals of activity

2024 Author: Howard Calhoun | [email protected]. Last modified: 2024-01-17 18:37

The main difference between commercial organizations and non-profit organizations is the following: the former work for profit, while the latter set themselves certain social goals. In a non-profit organization, profits must go in the direction of the purpose for which it was created. The members of such an organization do not have any legal rights to dividends, unlike a commercial company. To find out how a for-profit organization differs from a non-profit organization, you should first familiarize yourself with these concepts in more detail.

Definition of a business entity

The main purpose of a commercial organization is to make a profit from regular operations in order to maximize the funds of the owners. The profits generated by such organizations are used to develop the business or are kept in the form of reserves, or distributed to the owners as dividends.

Organizations with commercial goals seek to minimize costs andmaximize revenues to increase profits, grow and expand your business. They need to keep books for tax and audit purposes; tax is levied on business profits at a flat rate.

Definition of a non-profit organization

A non-profit organization, as the name suggests, is a legal organization whose main goal is to maximize the public good, not profit. According to the 7th Federal Law “On non-profit organizations”, a non-profit organization is an organization whose main goal is not to receive profit from its main activity and distribute it among participants. Such organizations are founded by a group of people who come together to achieve a common goal, that is, to provide services to members of the society.

These include: sports clubs, public hospitals, religious institutions, cooperative societies and many others. Non-profit organizations also make a profit, but the profit they make is used to further the purpose of the organization. They raise funds from a subscription, a donation, a government grant, a membership fee, an entrance fee, an inheritance, a charity, and so on.

Similarities between non-profit and commercial organizations

Both for-profit and non-profit organizations have goals and objectives that are clearly defined. Their products or services are known to everyone.

A non-profit organization must meet the goals and needs of stakeholders, just like a commercial one.

For-profit and non-profit organizations have limited resources and goals that must be met with limited funds.

Both for-profit and non-profit organizations create a management system that ensures the effective operation of the organization.

What is the difference between a for-profit organization and a non-profit organization?

One of the main myths about a non-profit organization is that it does not profit from business activities. A non-profit organization also earns profits from various activities, just like a commercial organization, but the way the profits are processed is different.

The main difference between a commercial organization and a non-profit organization is the purpose of the work. A for-profit organization operates for profit, while the purpose of a non-profit organization is to serve the public in the first place. The table below provides a comprehensive description of commercial and non-profit organizations.

Basis for comparison	Commercial organization	Non-Profit Organization
Definition	A legal entity that operates to generate profit for the owner is called a commercial entity.	A non-profit organization is a legal entity that acts for the benefit of society as a whole.
Purpose of work	Making profits.	Socialmotives.
Form of organization	Sole proprietorship, partnership or corporate ownership.	Consumer cooperative, public and religious organizations, foundations, institutions.
Management	One or more owners.	Trustees, committee or governing body.
Source of income	Selling goods and providing services.	Donation, subscription, membership fee and so on.
Basic Capital	Equity contributed by owners.	Funds from donations, subscriptions, government grants and so on.
Financial reporting	Income statement, balance sheet and cash flow statement.	Balance sheet, income statement and intended use of funds.

Goals of commercial organizations

The main difference between a commercial organization and a non-commercial one is the purpose of the work. Commercial organizations, as mentioned earlier, have one goal - to make a profit and everything connected with it:

1. Obtaining income by the owner or owners of the organization.
2. Ensuring the stability and smooth operation of the organization.
3. Ensuring the sustainable development of the organization.
4. Conquest of the market or a certain part of it.
5. Growth in efficiencyactivities of the organization.
6. Improve productivity.
7. Improve the quality of the goods or services offered.
8. Prevention of disruption to the organization, and so on.

Goals of non-profit organizations

Non-profit organizations exist primarily to provide help or resources to a target audience with a specific need. Thus, the main goals of the activities of a non-profit organization include:

1. Strategic. The strategic goals of a non-profit organization are focused on the services provided in the target market. These usually involve identifying the needs of the community in question and developing programs and projects to meet those needs.
2. Financial. Non-profit organizations must generate sufficient income to cover expenses and pay taxes (usually under a simplified taxation system). The financial goals include raising sufficient funds to finance the activities included in the strategic plan, as well as to cover fixed costs such as rent of premises, staff and utilities. The main objectives are to break even and maximize cash flow.
3. Operational. The operational goals of a non-profit organization are related to the management of funds and resources to solve specific problems. These include completing individual projects and programs in short bursts, finding needed resources, and other goals.
4. Goalsmanagement. Non-profit organizations are subject to strict governance requirements, mainly because they typically use donations or grant funds to carry out their work. Governance objectives include the development of prudent policies in areas such as resource procurement, event management, human resource and volunteer management, and asset and risk management.
5. Goals of partnership. Partnerships are vital aspects of nonprofit management. For example, a non-profit organization usually does not have enough money for advertising, so a partnership with a local newspaper can benefit both parties. The non-profit organization receives free publicity and the newspaper is recognized as a supporter of the organization's work.

Form of business ownership

One of the main differences between commercial and non-commercial organizations is the form of ownership. Individuals and legal entities may own interest or shares of a commercial company. The owner's share or percentage of ownership is recorded in the company's accounting system and may increase or decrease over time. The owners of this type of organization have the right to benefit from the activities of the company, receiving dividends or shares, with the possibility of sale. A commercial organization can exist in the following forms:

• General partnership.
• Special partnership.
• Limited liability company.
• Society with additional liability.
• Subsidiaries and affiliates.
• Production cooperatives.
• Joint stock company.
• Unitary enterprises.

Non-Profit Ownership Forms

Non-profit organization does not belong to anyone. You can found an organization or sit on the board of directors, but you do not own any share of the company. According to the 7th Federal Law "On non-profit organizations", there are such forms of them:

• Public and religious organizations (associations).
• Funds.
• Non-profit partnerships.
• Private establishments.
• Autonomous non-profit organizations.
• Associations (unions).

Capitalization and financing

A non-profit organization, often classified as a charitable organization, can receive funding and capitalization in any number of ways, including government donations, government grants, and fundraising. To do this, the non-profit must register to be able to legally solicit donations and fundraisers.

Commercial organization mainly operates through contributions from shareholders. Shareholders of a commercial enterprise have shares for a certain amount, the price of which may vary depending on the efficiency of the enterprise. Such companies distribute profits in the form of dividends to shareholders.

Differences between a non-profit organization and a charity

Registered charities are often referred to as non-profit organizations. Both non-profit and charitable organizations can operate on a non-profit basis. But non-profits should not operate solely for charitable purposes: they can work for social welfare, civic welfare, sports, and so on.

Signs of a commercial and non-profit organization

The differences between them are clearly defined:

1. A commercial organization is defined as a legal entity that operates for the sole purpose of making a profit from business activities. On the other hand, a non-profit organization exists with a primary purpose: to benefit society as a whole.
2. A profitable organization, as the name suggests, works to maximize profits; non-profit works to provide services, to improve the welfare of society. This is the main features of a commercial and non-profit organization.
3. A non-profit organization is governed by a board of directors, trustees, committee or governing bodies. The management of the commercial is carried out by the owner, a group of owners or a directorate.
4. The legal forms of commercial and non-commercial organizations are as follows. A profit organization can be sole proprietorship, partnership or corporate ownership; non-profit - a public organization, foundation, club, and so on.
5. The main source of income for a non-profit organizationis the sale of goods and services. She receives a significant portion of her income from donations, subscriptions, membership dues, philanthropy and other sources.
6. When it comes to starting a business, the owners manage the amount of seed capital contributed by all of them. A non-profit organization collects funds to start activities in the form of a contribution through donation, inheritance, subscription, etc.

The article presented the main differences between commercial and non-profit organizations.