Charities, Nonprofits, and Peculiar For-Profits

             Perhaps the most fundamental difference between a for‑profit entity and a not‑for‑profit (aka nonprofit) entity is simply whether they make a profit. That distinction may sound so obvious that it is not even worth giving a second thought, but the way people often respond to those characterizations of entities seems to obscure that understanding.

               One of the greatest confusions in this arena occurs when people equivocate “nonprofit” with “charity.” More often than not, this is analogous to rectangles and squares (i.e., a square is always a rectangle, but a rectangle is not always a square): most charities are nonprofits, but not all nonprofits are charities. Merriam-Webster defines charity as “a generosity and helpfulness especially toward the needy or suffering” or “an institution engaged in relief of the poor.” By definition, a charity is inherently unlikely to make a profit in furtherance of its goals. That’s not necessarily a bad thing, it is just different from a nonprofit which is defined as an entity “not conducted or maintained for the purpose of making a profit.” To be clear, there are two ways to not make a profit: the first is to lose money or operate at a loss, and the second is to break even.

               This may all be obvious, but the gap between operating at a loss and breaking even means there is a canyon full of different business or operating models that can be implemented toward achieving some goal. Some organizations may use a model that operates at a complete (financial) loss: every penny that comes through the door goes out the door to someone in poverty. Others may break even providing business counseling sessions to budding entrepreneurs at below‑market rates because the counselors and office staff are all volunteers, and the fees charged by the organization are only so much as it costs to cover rent and utility bills. Another organization might sell widgets, but it prices the widgets only so that it can afford to pay all of its employees without having any volunteers. And another organization might sell hammers for three cents more than it costs of manufacturing each hammer, paying its workers, and then using the three extra cents on every hammer sold, to reinvest in building hammer factories all over the country (perhaps so that the organization can reduce how far the hammers have to be transported to be sold, thereby reducing the amount of greenhouse gas emissions that it is responsible for). All of these organizations are operating in a way that (intentionally) does not make a profit, but how each one goes about “keeping the lights on” can vary.

               What this should tell you is that there can be a wide range of ways to accomplish goals without seeking a profit (not to mention ones that can make a profit). Some ways may work better than others, and some may be dependent upon specific factors (e.g., the purpose of the organization, the community the organization serves, fundraising prowess, etc.), but the variety of solutions fosters a diversity of opportunities.

               It should not be forgotten that a for‑profit characterization can be used to achieve what might otherwise be considered the domain of an organization that is not seeking to make a profit. While the public is still mostly in the dark about what is happening in the lawsuits against Purdue Pharma, snippets of news have suggested that at some point, settlement negotiations have included talks of “Purdue restructuring into a for-profit ‘public benefit trust.’” At first glance, restructuring Purdue, which is involved in thousands of lawsuits that allege it had a role in an opioid crisis that has killed nearly 400,000 people (archived link) between 1999 and 2017, into a new for‑profit entity, seems somewhat grotesque. But in an interview with NPR, Charles M. Tatelbaum provides the foundation for a likely theory for the “for‑profit” nature of the trust that has been suggested.

               If the plan is to allow Purdue Pharma to continue to operate so its profits and other assets can be transferred from the company to plaintiffs, other victims of the opioid epidemic, and efforts to stem the tide of the crisis (“transferees”), then there has to be a legal mechanism for that compensation to occur. The for-profit aspect of the trust makes sense if the intent is to distribute profits (from whatever future form Purdue takes) to the transferees. If Purdue was to suddenly operate as a nonprofit, then any profits it made would have to be reinvested, as generally speaking, it could not be distributed outside of some sort of model based around compensation for employees. 

               Setting aside liquidation as an option (as there are some concerns about Purdue’s valuation of itself if it were to be liquidated), most of the intended transferees are not employees of Purdue. That means there has to be some other mechanism to distribute assets and money to them, besides compensation (in the sense of employee compensation). A for-profit organization is able to do just that by making distributions to its shareholders, which under this possible structure, would be the transferees. And that outcome is why it makes sense that a for‑profit public benefit trust has been floated as a structure in which to reorganize Purdue Pharma. It may sound peculiar or a bit of a run-around to accomplish a specific goal, but it demonstrates how the characterization of organizations as either “for‑profit” or “not‑for‑profit” can sometimes be misleading. Left unchecked, incorrect assumptions about both kinds of organizations can limit the number of possible solutions that can be implemented to achieve a goal.


               There is flexibility and room for creativity in how an endeavor is structured. Maintaining a more nuanced understanding of the difference between for‑profit and not‑for‑profit entities can expand the number of ways in which that endeavor can be achieved. Talking through objectives, preferences, timelines, etc., for a new endeavor with an attorney is a good way to improve the likelihood of that endeavor’s success.