Not for Profit vs Non Profit: Everything You Need to Know
Nonprofit vs not-for-profit are two types of structures that companies can legally file under. All companies must generate profits to stay in business.3 min read
2. Non Profit Companies
3. Not-for-Profit Companies
4. Why File as an NPO or NFP?
5. How to Become an NPO or NFP
6. NFP and NPO Criteria
Non Profit vs a Not For Profit
Nonprofit vs not-for-profit are two types of structures that companies can legally file under. All companies must generate profits to some extent to stay in business. However, these structures are not focused on generating excess profits like other company structures are. Instead, they focus on using any profits to expand the company's operations and promote social good. Although they are similar, nonprofit and not-for-profit companies are distinctly different in key ways.
Non Profit Companies
Nonprofit companies, also referred to as NPOs or nonprofits, are companies that do not use their profits as rewards for company employees. In a normal company, profits can be distributed as bonuses or compensation for work. NPOs use their profits to create a positive change in the community. Charity work and social initiative for the well-being of the community are common causes for NPOs. NPOs also share the liability for the company between its founders, making NPOs limited liability companies.
Not-for-profit companies, or NFPs, are companies that are not focused on generating profits at all. Instead, they focus on completing specific non-monetary objectives while generating just enough revenue to operate. This revenue can be generated in a variety of ways. However, NFPs may not generate profits or revenue at all, and exist just long enough to fulfill the objectives of the parties involved. NFPs are often organizations that are formed to support larger groups.
Why File as an NPO or NFP?
Companies choose the NPO and NFP structures for specific advantages. Both structures allow the organizations to become tax-exempt, meaning that they have no tax liability. Not having to pay taxes significantly reduces the financial burdens on a company. This allows companies to focus on other pursuits besides creating profits for investors.
Another strong reason to choose these structures is the reason why each organization is founded. NFPs and NPOs are founded by groups that are interested in promoting a cause. You cannot deny that in modern times, companies have the majority of the influence on society. NPOs and NFPs leverage the strength of major organizations to generate funds and rally support for a cause within the community.
How to Become an NPO or NFP
Becoming an NPO or NFP requires legal action. In most cases, companies must file as one of the standard business structures that are limited to For Profit (FP) structures. This is to ensure that companies are not able to circumvent their tax liability when they are not qualified for tax-exempt status. Once a company is founded as an FP, it can file the legal paperwork to become an NFP or NPO. This may take a year and the company may have tax liabilities in its first year, but investments from the founding sources can often cover these liabilities.
Tax-exempt status is a special class of business status the removes the tax liabilities for a company. NFPs and NPOs often seek tax-exempt status to reduce their liabilities. Doing so requires the filing of the 501C(3) forms with the Internal Revenue Service (IRS). Once a company has achieved 501C(3) status, the company must comply with the requirements established by the IRS and other state agencies to maintain its tax-exempt status.
NFP and NPO Criteria
To qualify as an NFP, companies must adhere to the following criteria:
It has a central focus, such as a hobby or recreation, that is not related to profit or general business interests.
It does not have a governing board.
It does not have a charter (the document that defines a business' founding bylaws).
It is not designed to earn money beyond operational expenses.
It functions in small groups without a centralized and connecting governing structure.
To qualify as an NPO, companies must meet the following criteria:
It has a charter.
It is focused on serving the community (i.e. charities, social work groups, etc…).
It uses profits to fund the organization's operations, not to pay bonuses or dividends.
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