Finance & Accounting: For-Profit v. Not-For-Profit Business Entity

A for-profit conducts business operations to maximize shareholder wealth. The shareholders appoint the Board of Directors (via voting allocated along the lines of shares held) to oversee the financial well-being of the business from a bird’s eye view. The Board of Directors hire the management. Management is responsible for the carrying out of business operations with the primary objective of maximizing shareholder wealth. When things do not meet the expectations of shareholders, they will initiate the surgery; remove existing Board members. Newly appointed Board members hire new management. And the cycle continues.

A not-for-profit conducts business operations in order to carry out the mission statement of the business entity. The Board of Directors is typically appointed by the largest people, companies, foundations and the like that contribute the largest sums of money to the not-for-profit. The Board is responsible for monitoring business operations from a bird’s eye view and appointing management to carry out the day to day facets of activity that meet the objective of the entity’s mission statement. The residual increase in net assets through an efficiently run operating cycle belong to the mission statement – that is, any value-add belongs to the not-for-profit itself at the end of the operating cycle.

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