Not-for-Profit and Nonprofit: What’s the Difference?
Not-for-profit and nonprofit organizations have some important distinctions. While they both exist to collect and distribute money, they are treated differently for the purposes of tax, charters and other reasons. We’ll break down what that means so you can decide which kind of organization is best for you.
Similarities Between Nonprofits and Not-for-Profits
Before we get into the differences between these two types of organization, it’s worth exploring what they have in common.
- Neither generates a profit for their owners or members.
- Both types typically exist to offer services and support to individuals, groups or society as a whole.
- Both can apply for tax-exempt status, but the process is slightly different.
- After tax-exempt status is granted, donors can deduct their contributions from their taxable income under certain circumstances.
- Neither type of organization can retain profits or distribute them to owners.
- Neither type of organization pays dividends.
- Both of these types of organizations can make money, but it is expected that after paying expenses and operational costs, that any remaining money is distributed to follow the organization’s mission.
- Workplace requirements, regulation, and compliance guidelines are the same for nonprofits and not-for-profits, and are often identical to those requires of for-profit companies.
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Nonprofits Are Separate Legal Entities, Not-for-Profits Are Not
Typically, a nonprofit is a “separate entity” for tax, governance and management purposes, in a similar way to an LLC or corporation. Technically, a not-for-profit isn’t generally a separate legal entity, and doesn’t have a separate legal existence to its members. Not-for-profits are less common than nonprofits.
Learn how to start a nonprofit organization.
The Purpose of Nonprofits and Not-for-Profits Are Slightly Different
The stated purpose for each type of organization is generally different. Typically:
- A nonprofit is an organization that exists for a charitable purpose, like offering assistance to socially disadvantaged people, providing education, promoting the arts or running an animal shelter. They typically carry out bigger scale, organized charitable activities.
- Not-for-profits are generally associations formed by groups of people, for achieving the organization’s objectives. This could include membership associations, sports clubs, organizations for children and similar.
Nonprofits have More Scope than Not-for-Profits
A nonprofit organization can exist to support a wide variety of causes, and there is considerable scope in the types of ways they can help. Not-for-profits tend to be more narrowly focused. Nonprofit organizations are typically larger than not-for-profits.
The formation process for a nonprofit organization.
The Tax-Exempt Status of These Organizations Does Differ
Nonprofits can apply for tax-exempt status under the 501(c)(3) requirements of the IRS. There are strict guidelines that must be followed for Nonprofits that apply for a 501(c)(3) tax exemption do not need to pay tax on their funding and donations. If they pay employees, then they must pay standard payroll and other salary expenses, and their employees will also be subject to tax. A nonprofit can both employ people and maintain a volunteer program. Volunteers offer their time and services for free.
Salaries for employees of nonprofit organizations are typically funded outside of the organization’s fundraising operations.
Incfile can help you start your 501(c)(3).
Not-for-profits do not qualify for tax-exempt status under 501(c)(3). Instead, a not-for-profit needs to meet 501(c)(7) IRS guidelines to be considered for tax-exempt status. The IRS mandates that a not-for-profit must be organized for pleasure, recreation and other similar non-profitable purposes. It is generally more difficult to become tax-exempt as a not-for-profit than as a nonprofit. Not-for-profits are often run by volunteers, not paid workers. Not-for-profits may have a “membership roster” that benefits from the organization in some way, such as having expenses paid.
Banks May Treat These Organizations Differently
Some banks see a clear distinction between nonprofits and not-for-profits. This is mainly due to nonprofits being considered as an independent legal entity, while not-for-profits are not. This may affect how easy it is to get a bank account and the requirements an organization will need to follow.
Nonprofits Have a Charter, Not-for-Profits Do Not
A nonprofit normally has a national or state charter. This charter often provides people involved with the nonprofit with legal and financial protections. Nonprofits have a board that oversees and directs the organization. Not-for-profits typically do not have a charter and are not normally required to have a board.