Understanding the difference between a nonprofit and a not-for-profit is important for those looking to start a business for a cause. While the terms may seem interchangeable, the way they’re categorized for tax purposes and their typical functions tend to differ.
Our guide looks at the similarities and differences between the terms.
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What Is a Nonprofit?
A nonprofit organization is primarily established to address a specific cause or advocate for a shared point of view. While they generate income, the key difference between them and a for-profit business is that the earnings are reinvested back into their mission, ensuring societal benefits rather than personal gain.
Key Features of Nonprofit Organizations
- Purpose Driven: At their core, nonprofits are here for one thing: the broader public good. Whether that’s feeding the hungry, sheltering the homeless, or pioneering scientific research, their sights are set on societal impact.
- Credibility and Transparency: Nonprofits are bound by specific regulations, ensuring they operate transparently. By disclosing their financials, they gain trust and can better appeal to stakeholders and the public.
- Property Taxes: Many nonprofits are eligible for property tax exemptions, provided they use the property primarily for their tax-exempt purposes. This reduction in operational costs can further ensure that more funds are directed towards their mission, maximizing the impact they make in their communities.
- Sales Tax: Depending on the state, nonprofits might also be exempt from sales tax on purchases related to their mission. This means fewer expenses when buying goods and services, allowing them to allocate even more resources to their primary objectives and enhance their community contributions.
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What Is a Not-for-Profit?
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At its core, a not-for-profit organization exists primarily for purposes other than generating profit. While they might raise funds or earn income, these proceeds are reinvested into the organization’s mission rather than distributed to owners or shareholders the same way Nonprofit organizations are structured.
It’s important to note that Internal Revenue Service (IRS) doesn’t have a specific distinction for “not-for-profits.” If a not-for-profit is filing for federal exemption, it all falls under 501c.
There are many categories within 501c, with 501c3 being the most commonly recognized as it pertains to charitable organizations. However, other types exist, such as 501c4 for social welfare organizations, 501c6 for business leagues, and more.
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Key Features of Not-for-Profit Organizations
- Focused on Community: These entities often cater to specific group interests rather than expansive societal goals. From local sports teams and art appreciation clubs to college fraternities, they provide a niche platform for shared interests.
- Donation Dynamics: While they might carry out fundraising campaigns to raise money, similar to nonprofits, donations to not-for-profits aren’t always tax-deductible. It’s essential to know this distinction when contributing or soliciting funds. To see what the requirements are for nonprofit tax exemption, visit the IRS website.
- Flexible in Purpose: Without stringent regulations on societal benefit, not-for-profits can enjoy more flexibility in their activities and mission, as long as they’re not distributing profits to members.
Nonprofit vs. Not-for-Profit: Differences
At a glance, both nonprofits and not-for-profits have a common thread: they aren’t established to benefit shareholders or members financially. However, the nuances lie in their purpose, use of profits, tax implications, and donor benefits.
| Feature | Nonprofit | Not-for-Profit |
| Purpose | Must serve the public good | Not required to serve the public good |
| Profits | Must be used to further the organization’s mission | Can be used for any purpose, as long as they are not distributed to members or shareholders |
| Taxation | May be exempt from federal income tax if they apply and qualify | May be exempt from federal income tax if they apply and qualify |
| Donations | Donations are tax-deductible for donors with 501c3 status | Donations are not tax-deductible for donors |
It’s important to note that state regulations can sometimes use the terms “nonprofit” and “not-for-profit” interchangeably when referring to formation documents. For instance, in Illinois, the Not-for-Profit Articles of Incorporation (and the Not-for-Profit Act as a whole) pertain to nonprofits as a whole.
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Nonprofit vs. For-Profit
Unlike a nonprofit organization, for-profit businesses are established with the primary intent of generating profits for the business owner or their shareholders. The main focus isn’t necessarily societal or community benefits, but rather earning a profit from goods sold or services provided.
Key Features of For-Profit Businesses
- Objective of Earnings: The core intent behind for-profit businesses is to earn profits and possibly distribute them as dividends to shareholders. This contrasts sharply with nonprofit entities that reinvest earnings for public benefit.
- Taxation Dynamics: While nonprofits might attain tax exemption status due to their societal focus, for-profit entities are subjected to taxes on their profits. Business owners need to factor this into their operational costs.
- Legal Framework: A for-profit is a separate legal entity that can be bought, sold, or inherited, unlike many community organizations or nonprofits.
- Purpose Versatility: The mission of a for-profit isn’t strictly tied to community or societal impact. They can operate with diverse objectives, provided they adhere to legal business practices.
While both nonprofit and for-profit entities play critical roles in our society, their key differences lie in their primary objectives, taxation structures, and their relationship with shareholders or members.
Before making a decision, always weigh the advantages and challenges each organizational structure presents, aligned with your mission and long-term goals.
FAQs
How do nonprofits and not-for-profits differ in purpose?
In general, nonprofits serve the public good, while not-for-profits focus on group or community activities without a broader societal mandate.
Are nonprofits and not-for-profits tax-exempt?
Tax-exempt status is determined by how entities are governed by the IRS rather than their “nonprofit” or “not-for-profit” designations. While many nonprofit entities have tax-exempt status, particularly those under the 501c3 category, not-for-profits can also obtain certain exemptions if they fall under categories such as 501c6 or 501c7.
Do nonprofits and not-for-profits rely on fundraising?
Yes, both a nonprofit organization and a not-for-profit might depend on fundraising, but tax benefits for donors differ.
Is a nonprofit 501c3?
Nonprofits can choose to file for 501c3 status with the IRS, but not all nonprofits choose to. Additionally, nonprofits can file for exemption under other 501c sections, such as 501c4.
Does the IRS recognize not-for-profits?
Not-for-profits can file for exemption with the IRS, but they do not use the specific term “not-for-profit” in their publications. Technically, not-for-profits formed under sections like 501c6 would be categorized as “other nonprofit” by the IRS.
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