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To Profit or Not to Profit

Posted in Business, and Taxes

The currently trendy demonization of capitalism and profits and the misperception that “non-profits” are somehow better or more virtuous than for-profit enterprises are unfortunate. Greed is not good, but profits are required and are used to pay dividends to shareholders, reduce debt, invest in growth, and provide a cash cushion in case of unexpected needs. Profits are not used to pay management or to advertise brands or products or to send employees to Las Vegas or Maui on retreats, all costs of which must be subtracted from revenues as part of the profit calculation.

Corporate taxes and the taxes their employees pay provide most of the money required to fund the federal government. Unfortunately for the American economy, our corporations are taxed at the third highest rate in the world, behind only the UAE and Puerto Rico. Plus the dividends paid from those profits to shareholders are taxed again on the recipients’ 1040’s. Reminds me of the old Willy Sutton comment about why he robbed banks. It is a bad situation and puts American business at a competitive disadvantage in the world economy.

Granted, many corporations don’t end up paying taxes at those high rates because of our convoluted, unfair, winner and loser picking, vote buying, tax code loaded with exemptions, credits, exclusions, and deductions, but the expensive lobbying and bookkeeping required to establish and qualify for those benefits and the time spent on them by Congress are counterproductive. I and many fiscal conservatives believe we could have more tax revenue from corporations and their employees with a tax code offering much lower rates with no exemptions, exclusions, deductions, or credits. But that is another story I have explained elsewhere.

Of course “non-profits” depend on “profits” also because their income has to exceed their outgo or they would cease to exist or, would at least, shrink in importance. They don’t pay dividends, but they do often have debt to be paid and need funds for expansion and for contingencies. There are six major differences between for-profit stock companies and non-profits.

  1. First, non-profits don’t have to pay taxes.
  2. Second, they are not subject to the same financial reporting requirements as publicly owned companies making it much harder for citizens to figure out exactly where the money is going.
  3. Third, they are not under continuous scrutiny by shareholders trying to decide whether to sell their shares or buy more.
  4. Fourth, they do not face the same pressures for efficiency and continuous improvement that publicly owned and listed companies have.
  5. Fifth, in the case of 501(c)(3) non-profits, tax deductible contributions can be accepted.
  6. Sixth, they have no owners who can benefit from growth in value of the enterprise. If a non-profit ceases to operate, all assets must be transferred to another non-profit enterprise or donated.

I currently volunteer at and provide some financial support to four non-profits besides my Church. Birthright of Columbia is a pregnancy services organization, Home Works of America repairs homes of low-income elderly homeowners, Clean of Heart is a Catholic organization that provides free showers and laundry service to homeless individuals, and Christ Central Ministries offers a wide variety of services to low income folks in a dozen different South Carolina counties. I serve on the Board of Directors of Birthright. So, I know a little about non-profits and am thankful for the opportunities to serve provided by them. But they could not exist without the funding and volunteer labor provided by private companies and their employees and retirees. “Profits” are good and necessary for both for-profit and not-for-profit enterprises. But I’m not going to offer any volunteer services at GE or GM or Facebook or Bank of America.

Capitalism and for-profit enterprises have done more in the USA and globally than any other system to eliminate poverty and raise standards of living. And sometimes even non-profits can have unethical, crooked, or selfish management. So, let’s base our assessments of organizations on the benefits they provide rather than on whether they are for-profit or not-for-profit.

One other point. Non-profit does not necessarily mean charitable. Once a little tax slack is cut for one type of organization, a line forms demanding similar treatment. There are now 29 categories of non-profits, the charitable 501(c)(3) being only one of the 29. The 501(c)(29) tax exempt organizations are health insurance co-ops. You can see the list, covering everything from social clubs to cemeteries, here. By the time you look, number 30 may be in place.