How Nonprofits Work

If you're confused about the differences between nonprofit organizations and for-profit corporations, then read on. In many fields such as childcare, medical day care, nursing homes, substance abuse treatment, sports and recreational facilities and others, there are both nonprofit and for-profit service providers. Whether an entity is a nonprofit or for-profit company may not be immediately apparent.

It's a given that for-profit childcare centers are designed to make a profit. Consequently, it may be difficult to find a for-profit childcare center to serve families with limited incomes or families whose children need specialized childcare. World of Care, a medically based childcare center operated by PACT: Helping Children with Special Needs, is one of the local area non-profits filling this void.

World of Care is a unique childcare center in the Baltimore metropolitan region, staffed and equipped to serve medically fragile and disabled young children. It's an expensive undertaking. Due to the special needs of the children, the staff-to-child ratio is high with one staff member, including nurses and social workers, to every three children. Eighty-five percent of the families with children enrolled in World of Care are low income, and the actual cost of providing one day of medically based childcare is approximately $141 per child. If World of Care were to pass this cost on to parents, it would shortly be out of business.

World of Care's program survives because it doesn't depend entirely on parent fees for revenue. It is the support from individuals, foundation grants, and two major state agencies, the Maryland Departments of Health and Mental Hygiene as well as Human Resources and Education, that help fund the World of Care program. Without World of Care, almost 100 families each year, whose children have diagnoses ranging from severe heart and breathing problems to diabetes and epileptic seizures, would not have had access to childcare.

Serving A Public Need

Serving a public need is what drives nonprofits to do good work. While most for-profit entities are charged with maximizing revenues for owners and shareholders, nonprofits are driven by a mission to make a difference within the community in some way. Nonprofits often provide a service or do work that is not being done by for-profit companies.

One of the things that separate a nonprofit organization from a for-profit company has to do with how monetary profits are distributed. A for-profit company can distribute its profits to its shareholders, owners, employees, and executives. On the other hand, a nonprofit organization does not exist to earn money for owners, shareholders, or employees. It exists to serve the public through its services, programs, or products. It is a common misconception that “nonprofit” is interchangeable with “does not” or “cannot make a profit.” The IRS guidelines simply state that profits cannot be distributed to private individuals, such as the nonprofit's board or staff members, but the law does not forbid nonprofits from making a profit. Any excess funds that a nonprofit organization earns must be used by the organization in order to continue to work toward achieving its mission through its charitable program services.

Another big difference between a nonprofit and a for-profit company is that the nonprofit doesn't have owners in the traditional sense. The tax laws prohibit a nonprofit from being owned by private individuals. Once a nonprofit is established, in effect it owns itself. If a nonprofit goes out of business, it cannot simply distribute assets and equipment to its leaders. The nonprofit is required to distribute its assets and other goods to another qualified charitable organization.

Common Misconceptions

There is another common misconception that nonprofit organizations cannot pay their employees. Here too, nothing could be further from the truth. In fact, the largest portion of expenses for nonprofits are the costs of the skilled, paid staff who are involved in providing what is often specialized services.

A nonprofit's board, on the other hand, does not get paid. In fact, one of the unique features of nonprofit organizations, in contrast to for-profit companies, is that nonprofits are governed by a Board of Directors that is composed of volunteers. A nonprofit's volunteer board of directors is legally and ethically responsible for safeguarding the public's trust, for protecting the organization's assets and operations, and upholding the organization's mission. Boards are responsible for ensuring that the nonprofit meets all legal requirements of local, state and federal governments. Board members are to act in the best interest of the organization, rather than in furtherance of their personal interests.