Key Takeaways

  • Nonprofits aim to serve the public good, while for-profits focus on generating income for owners and shareholders.
  • A nonprofit is owned by the public and governed by a board, whereas a for-profit is owned privately.
  • "Nonprofit" and "not-for-profit" are often used interchangeably but can have subtle differences, especially regarding tax status and operational focus.
  • Nonprofits can generate profits but must reinvest them into their mission, not distribute them as earnings.
  • Not-for-profits typically operate on a smaller scale and may be centered around member activities rather than public benefits.
  • Legal formation, taxation, and funding structures vary significantly between the two types.

Non profit vs for profit can be differentiated in this way; a for-profit organization's primary goal is generating profit whereas a nonprofit does not focus on profit and instead is dedicated to the promotion of a cause or standpoint. 

Nonprofit Characteristics

Purpose

A misunderstanding held by many people is that a nonprofit is not in a position to make a profit. This is not true. Like any business, the revenues must exceed the expenses to remain viable. 

As a nonprofit, its main focus is pursuing a purpose or cause that is beneficial to the public.

Ownership

Nonprofit organizations are not privately owned nor are they controlled by one person; they are owned by the public.

Any assets held by a nonprofit are dedicated to the purposes of the specified charitable, literary, religious, or educational organization. Other property or equipment and cash are not allocated to a single person nor can they be used for anyone's private benefit unless fair market compensation is paid to the nonprofit organization.

Control

A board consisting of directors and trustees control the nonprofit with the sole purpose of ensuring the organization fulfills its goal/purpose. 

The board members work as a group, not as individuals. The benefit of this governing format means no one individual can control a nonprofit. 

Some states have rules in place governing the pay of the board of directors. In general, the board of director's members do not receive any compensation other than travel expense to and from board meetings. 

Accountability

A nonprofit organization must file annual information returns with state and local governments. 

Nonprofits file Form 990 with the Internal Revenue Service (IRS), which reports the finances of the organization including the salaries paid the five non-officer employees earning the highest salaries.

Since a nonprofit is owned by the public, Form 990 must be made available at the organization's website or headquarters. 

The State's Attorney General's Office has oversight of nonprofit organizations, which has the authority to take a nonprofit to court if necessary.  

How Nonprofits and Not-for-Profits Are Funded

Nonprofits primarily rely on public donations, grants, corporate sponsorships, and fundraising events to support their missions. Not-for-profits, while they may also accept donations, tend to fund activities through membership dues, event fees, and program services related to their cause​.

What Is the Difference Between Nonprofit and Not-for-Profit?

While "nonprofit" and "not-for-profit" are often used interchangeably, there are subtle differences. Nonprofits, like charities, must operate to benefit the public and often qualify for tax-exempt status under IRS Code 501(c)(3). Not-for-profits, on the other hand, are generally organized for mutual benefit of members—such as recreational clubs—and may not always seek tax-exempt status. Not-for-profits can earn revenue but typically apply it toward the organization's goals without distributing it to members.

Differences Between Nonprofit and For-Profit Organizations

Funding

A nonprofit organization usually seeks out private sources for funding such as:

  • Private donations of time and money.
  • Government grants.
  • Corporate sponsorships.
  • Crowdfunding.

A for-profit organization relies on different methods for funding its operations and projects. Examples of funding sources include:

  • Bank loans.
  • Local investors.
  • Sales generation.
  • National or global investors.

Diversity of Audience

The focus of a nonprofit is to deliver a message about a service, action, or product. Because they are not directly delivering a product or service, their target audience must be diverse to encompass the general public, corporate sponsors, donors, and volunteers. The organization must be precise in considering each segment of its audience to get the most in results.

The for-profit organizations pinpoint and target specific audiences. Their goal is creating a base of consumers who will purchase goods or services to generate revenue. A for-profit has the ability to increase its offerings and its revenue by continually targeting new audiences. 

Leadership

Nonprofit organizations are generally led by a board of directors who do not have any financial ownership of the organization. A board of directors has no set limit on the number of people who may be involved. While the goal of a nonprofit is not monetary, the board does have leadership meetings to discuss many topics that include financial concerns. Other topics open for discussion at a board meeting include areas such as:

  • The social climate
  • Environmental concerns.
  • Social and political policies.
  • Upcoming projects.
  • Fundraising.
  • Organizational performance.
  • Community concerns. 

The for-profit organization is just the opposite, with leadership responsibilities allocated to a few select individuals. This may involve individuals of a privately held business or a large corporation. Leaders have a financial interest, or stake, in the organization's financial success and often receive incentives such as profit sharing or bonuses. These individuals are primarily concerned with profits and increasing the organization's revenue. 

Organization Culture

Nonprofit cultures are more community-oriented because financial gain is not the goal of those working for the organization. In contrast, for-profit cultures are driven by financial gain and focus on key performance indicators (KPIs).

Taxation

Because a nonprofit is registered as a 501(c)3 organization, it can provide services as a public good that do not require a portion of the earnings to be paid to the government. 

For-profit organizations do not benefit from tax exemptions and must pay applicable taxes. 

Tax Implications

Nonprofits that qualify for 501(c)(3) status are exempt from federal income taxes and can offer donors tax deductions for contributions. Not-for-profits may also receive tax exemptions, but they are typically under different IRS codes like 501(c)(7) for social clubs. It's important to consult a tax professional to ensure the correct designation and compliance with both state and federal requirements.

Mission Focus: Public vs. Member Benefit

Nonprofits must operate primarily for the public good, whether through education, science, religion, or charity. Not-for-profits, however, typically serve the interests of their own members. For example, a local sports club exists to provide benefits to its members rather than the broader community.

Legal Structure and Formation Requirements

To form a nonprofit, you must file articles of incorporation with your state, create bylaws, appoint a board of directors, and apply for federal tax-exempt status. Not-for-profits may not pursue 501(c)(3) status but still must register with their state and follow regulations if they collect dues or donations. The nonprofit's compliance obligations tend to be more complex due to IRS requirements.

Frequently Asked Questions

1. What is the main difference between a nonprofit and a not-for-profit?

A nonprofit focuses on serving the public good and often qualifies for tax exemption under 501(c)(3), while a not-for-profit primarily serves the interests of its members and may operate without seeking full tax-exempt status.

2. Can a nonprofit organization make a profit?

Yes, nonprofits can earn profits, but they must reinvest those profits into advancing their mission rather than distributing them to owners or shareholders.

3. Do not-for-profits pay taxes?

Some not-for-profits qualify for tax exemptions, but they often operate under different sections of the IRS code, such as 501(c)(7) for recreational clubs. Others may be subject to certain taxes depending on their structure and activities.

4. Who controls a nonprofit organization?

Nonprofits are controlled by a board of directors or trustees who oversee the organization's activities and ensure it operates according to its mission.

5. Is it easier to start a not-for-profit or a nonprofit?

Starting a not-for-profit can sometimes be simpler because it may not require federal tax-exempt status. However, both entities must meet state registration requirements and comply with specific regulations.

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