Boards for Corporations, Nonprofit Corporations, Foundations and Hybrids: What’s the Difference?
Laws and regulations set the standards for corporations to have boards of directors. Chartered or registered boards fall into the category of corporations, even though they don’t make or distribute profits to their members or stakeholders. What makes things a little confusing is that not all nonprofit organizations are chartered or registered, which means they can have boards, but they are not required to have them. Nongovernmental charitable foundations represent another important sector. They are considered to be nonprofit organizations or charitable trusts with the purpose of making grants to organizations to advance scientific, cultural, religious, educational or other charitable issues. If that’s not complex enough, a few organizations are finding ways to combine the two.
It may seem that for-profit and nonprofit organizations have little in common, but they actually have more similarities than differences. Let’s explore them.
Characteristics of Corporate Boards
What do you think of when you hear the words corporate board? Most people would say, “big money.” And they’d be partially right. Corporations are owned by the stockholders, and they expect as large a return on their money as possible. It’s up to the board of directors to use strategic planning to set the company on course for profit and sustainability. Corporate boards define success by the amount of profit the company earns and how it aligns with their forecasts.
Board members of corporations may have knowledge, expertise and even passion within their industry, but their main interest is in making money for the company, and also for themselves. While corporate board members have the responsibility for duty of care, duty of obedience and duty of loyalty, they vie for corporate seats because of the pay. Corporate board members are usually paid based on the company’s profits, and some of it comes in the form of stocks.
The board dynamics of corporations are a bit different than those of nonprofit boards. In a for-profit, the CEO is often on the board, and in some corporations, the CEO also serves as board president.
Profits are important to stockholders as well as board members, as they share in profits to varying degrees, which makes the board members highly accountable to the stockholders.
Because corporations are profitable, most corporations are required to pay taxes to the government. Board members who invest their own money into the corporation are also subject to taxation.
Like nonprofit boards, corporate boards have a culture, vision and mission that guide the organization’s efforts, even though their main focus is on profits.
Characteristics of Nonprofit Boards
What do you think of when you hear the words nonprofit board? Most people would say “charity.” Again, they’d be fairly accurate. Have you ever wondered who owns nonprofit organizations? No one and everyone. No one individual or group of individuals owns a nonprofit organization, unless it’s a foundational nonprofit organization, which we’ll talk about a bit later. The public owns most nonprofit organizations.
Nonprofit organizations exist to serve the public, so they define their success by how well they meet the needs of the public. Nonprofits raise funds to fight disease and to create awareness about diversity, homelessness, poverty, children’s issues, hunger and numerous other worthy causes.
Nonprofit boards also have a responsibility for duty of care, duty of obedience and duty of loyalty. Duty of care means that nonprofit boards have a fiduciary responsibility to care for the organization’s money. The public expects that the board will work hard to remain financially solvent and that their funds will be spent wisely and according to the organization’s mission.
Unlike a for-profit corporate board, the board members of nonprofit organizations are usually volunteers. The organizations may have paid employees, but the corporation must use excess funds to serve the public in some way. Also, unlike for-profit corporate boards, the executive director of a nonprofit board is usually not a voting board member, though they usually attend board meetings.
Depending on how the nonprofit is registered, the nonprofit board may not have to pay taxes. Large nonprofit corporations may have to pay taxes if they fundraise or receive donations over a certain amount.
The IRS allows board members to donate their own money and to deduct the amount from their taxes.
Characteristics of Foundational or Charitable Boards
What do you think of when you hear the term foundation or charitable board? Most people would say, “grants.” They’d be right. Foundation boards have members who are philanthropists who give their money away to advance the works of nonprofit or social service organizations, to better a cause. Causes may be medically related, social service related or related to almost any other issue.
Foundation board members usually have expertise in finance. They may have designations or certifications in the field that serves the foundation. As with other types of boards, board members have responsibility for duty of care, duty of obedience and duty of loyalty. Board members are usually volunteers, though the board may opt to reimburse them for expenses.
Many foundational boards insist on term limits with at least a one-year hiatus between terms. Conflicts of interest may develop when board members have a competing interest with another charity. These boards need to have policy statements about how they announce and handle such conflicts.
Characteristics of Hybrid Corporations
Hybrid corporations are an emerging trend where the nonprofit world melds with a for-profit corporation. Some nonprofit companies had trouble getting enough income with grants and donations alone, so they found other ways to support their cause. Goodwill and the Salvation Army have done this successfully. Primarily, they are both charitable organizations, but they both own and operate resale shops to make money to reinvest in their nonprofit organizations.
Other companies started out as for-profit entities and wanted to use some of their profits to make an impact on causes they care about. Chik-fil-A is one such company that straddles the rails as a for-profit organization with many nonprofit interests.
Some Final Words on the Differences in Boards of Directors
The type of IRS registration determines the laws and regulations for the type of corporation. Entities have different rules for taxation according to their purposes. An organization’s purpose and whom they serve defines the duties of the board of directors. Regardless of the recipients of the board’s efforts, the main principles of duty of care, duty of obedience and duty of loyalty transcend all types of boards.