Not-for-Profit vs Non-Profit: Key Legal Differences

Key Takeaways

• The terms not-for-profit and non-profit are often used interchangeably, but legally they differ in purpose, tax classification, and organizational structure.
• Nonprofits serve the public good and often qualify for 501(c)(3) tax-exempt status, while not-for-profits focus on member or community benefits under categories such as 501(c)(4) or 501(c)(7).
• Nonprofits can receive tax-deductible donations; not-for-profits generally cannot.
• Governance and recordkeeping requirements are typically stricter for nonprofits.
• Understanding the purpose, audience, and funding model is essential before deciding whether to register as a nonprofit or a not-for-profit organization.

Not-for-profit vs. nonprofit--what's the difference? Both types of organizations are operated with the intent to raise money or awareness for a particular cause or group rather than to increase profits and money for the business's shareholders. Sometimes the two names are used interchangeably, but there are differences between these business entities.

Differences Between Not-for-Profit and Nonprofit

Numerous organizations operate without the goal of making a profit to satisfy shareholders and company owners. Not-for-profit and nonprofit companies both use their income to help those in need. However, there are some major differences between the two.

Not-for-profit companies:

• Are run by volunteers, not paid workers.
• May include an income roster that directly benefits from the company's income
• Are less common than nonprofit organizations.
• Are often set up for the welfare of society and may provide assistance and advice to the general public, or a specific demographic.
• Can be charities, hospitals, religious groups, clubs, trade unions, welfare societies, and other similar organizations.
• Provide local communities with helpful services.
• Are typically smaller than nonprofit companies.

Nonprofit organizations:

• May have employees that get paid a salary, but the salary does not come from the company's fundraising work.
• May also hire volunteers, but these individuals do not benefit from the company's income.
• Have a purpose besides making a profit, such as promoting cultural, educational or religious beliefs and objectives.
• Can qualify for tax-free fundraising because their income supports and sustains their services (as opposed to for-profit companies that provide a corporate service with the intention of the transaction being profitable).
• Generally pay lower salaries than private companies but allows room for increased pay with advancement.

Although both companies can make money from their various activities and fundraising initiatives, these funds must used for additional charity work or reinvested to further the company's operations. No profits will be distributed to any members, directors, or trustees.

It may be interesting to note that a not for profit company can't function as a non-profit company; however, a nonprofit company can, in fact, operate as a not-for-profit organization. The IRS classifies various types of organizations, events, and activities as either nonprofit or not-for-profit.

Legal Recognition and Regulatory Oversight

Although both nonprofits and not-for-profits operate without profit distribution to owners, they differ in legal standing and oversight.

• Nonprofit organizations are recognized as separate legal entities under state and federal law, often requiring incorporation and compliance with the IRS’s exempt organization requirements. They must file annual informational returns (Form 990) and maintain public records for transparency.
• Not-for-profit entities, while also mission-driven, may not always incorporate and can function as unincorporated associations. They often face fewer disclosure obligations and less regulatory scrutiny unless they seek tax-exempt recognition under the IRS Code.
• Some states require nonprofits to register for charitable solicitation licenses, while not-for-profits—such as small social clubs—may be exempt from these requirements.

Key Functional and Operational Distinctions

While both nonprofits and not-for-profits operate without the goal of profit distribution, their core activities and organizational purposes differ:

• Purpose: Nonprofits typically serve public or charitable purposes (education, science, religion), while not-for-profits may serve the mutual benefit of members (e.g., a sports club).
• Legal Structure: Nonprofits must incorporate and register under specific federal tax codes (typically 501(c)(3)), whereas not-for-profits may fall under other IRS classifications like 501(c)(7) or 501(c)(4).
• Fundraising Activities: Nonprofits often rely on public donations and grants and must adhere to strict fundraising regulations. Not-for-profits may fund operations through member dues or smaller fundraising efforts.
• Governance: Nonprofits generally maintain a formal board of directors with fiduciary responsibilities. Not-for-profits may operate with more informal governance, depending on their size and scope.

Funding Sources and Donor Incentives

Nonprofits and not-for-profits differ significantly in how they raise and use funds:

• Nonprofits rely heavily on donations, grants, and endowments. Because they serve public causes, contributions to qualifying 501(c)(3) entities are tax-deductible for donors. They may also apply for government or foundation funding.
• Not-for-profits, by contrast, sustain themselves through membership dues, events, or service fees. Their income supports their operations or member services, but donors cannot claim tax deductions for contributions.
• Some not-for-profits, such as homeowners’ associations or hobby clubs, operate mainly through member contributions, maintaining internal rather than public benefit purposes.

Definition of a Nonprofit Organization

A “nonprofit” is an organization that does not operate with the purpose of monetary gain. Nonprofit organizations are often referred to as NGOs. They can be defined in simple terms as organizations that work for any form of charitable purpose. This purpose may include (but is not limited to) promoting commerce, art, science, or other areas. Nonprofit organizations that are licensed under section 8 of the Indian Companies Act have limited liability and are granted tax-exemption by the Internal Revenue Service (IRS).

Employment taxes, in addition to federal and state rules affecting the workplace, are generally the same for both nonprofit and not-for-profit organizations.

In order to classify as a nonprofit, the organization must work to achieve the group objectives of the company and its charitable purposes instead of prioritizing dividends.

Common Types of Nonprofits and Their Purposes

The IRS recognizes 29 types of nonprofit organizations under Section 501(c), each serving different goals. The most common include:

• 501(c)(3): Charitable, educational, religious, or scientific organizations (e.g., Red Cross, Habitat for Humanity).
• 501(c)(4): Civic leagues and social welfare organizations that may engage in limited political activity.
• 501(c)(6): Business leagues and trade associations (e.g., Chambers of Commerce).
• 501(c)(8): Fraternal societies that provide benefits to members.
  While all are classified as nonprofits, only 501(c)(3) organizations can offer donors full tax-deductible contributions, a critical distinction from most not-for-profits.

IRS Classification and Tax Benefits of Nonprofits

Nonprofits often apply for 501(c)(3) status with the IRS, granting them federal tax-exempt status. This classification enables:

• Exemption from federal income taxes.
• Eligibility for public and private grants.
• Ability to provide donors with tax-deductible receipts.
• Reduced postal rates for mailings.

To qualify, the organization must not distribute earnings to private shareholders or individuals and must operate exclusively for exempt purposes. They are also subject to annual reporting via IRS Form 990.

Definition of a Not-for-Profit Organization

Like a nonprofit, a not-for-profit company is one which does not distribute profit to its owners and shareholders but instead invests them back into their business and its initiatives. Anybody who sees a need can establish a not-for-profit company in order to assist people in need.

Not-for-profit organizations can include clubs such as sports clubs, which often host fundraising events to raise money for a particular cause. These fundraising efforts are still considered “not-for-profit” even if the funds are then donated to a nonprofit group.

Some not-for-profit organizations are given tax-exempt status under section 501(a) of the Internal Revenue Code; however, in order to obtain this, the company has to request 501(c)(3) status from the IRS. These companies also do not have to pay property or sales taxes.

A not-for-profit organization reinvests all the money it has earned, raised, or received through donations back into the operation of the business and further its causes.

Key Tax and Compliance Considerations

Not-for-profits often seek tax exemption under IRS Code 501(a) but may qualify under categories like 501(c)(4) or 501(c)(7) rather than 501(c)(3). These distinctions affect how they report income and handle donations:

• Income is not taxed if related to the organization’s exempt purpose. However, unrelated business income is subject to standard taxation.
• Not-for-profits typically file Form 990-N or Form 990-EZ, depending on annual gross receipts.
• To maintain tax-exempt status, they must ensure all earnings are reinvested toward their mission or member services and not distributed as profits.

Additionally, failure to comply with IRS filing or use-of-funds regulations can lead to penalties or revocation of exempt status.

Types and Examples of Not-for-Profit Organizations

Not-for-profit organizations encompass a variety of entity types that exist for mutual benefit, not public service. Examples include:

• Amateur sports leagues
• Social or recreational clubs
• Homeowners' associations
• Hobbyist groups
• Professional associations

These organizations may qualify under different sections of the IRS tax code, such as 501(c)(4) (social welfare), 501(c)(6) (business leagues), or 501(c)(7) (social clubs), depending on their primary function and membership structure.

Governance, Accountability, and Public Perception

Public trust plays a central role in both structures, but accountability standards differ:

• Nonprofits must maintain formal boards of directors, annual meetings, and written bylaws. Their financial statements are often public to ensure transparency.
• Not-for-profits have more flexibility, sometimes governed by a small group of volunteers or members. Their finances are typically private unless required by state law.
• In public perception, nonprofits are often seen as community-focused charities, while not-for-profits are viewed as member-focused organizations, such as clubs or associations.

Not-for-Profit Organization Assets

Specific restrictions apply to a not-for-profit organization's assets. These restrictions include guidelines about using donations from third-party organizations, agencies, or individuals. These are typical preferences about how the donor would like the funds to be spent.

Real estate is one of the most commonly restricted assets. For example, an organization could donate land to a nonprofit university with the stipulation that it be used for athletic fields rather than at the school's discretion.

How to Choose Between a Nonprofit and Not-for-Profit

Deciding between a nonprofit and not-for-profit depends on your organization’s mission and intended beneficiaries:

• Choose a nonprofit if your organization will serve the public good, pursue tax-deductible donations, and seek government or foundation grants.
• Choose a not-for-profit if your group exists primarily for member benefit or community recreation, with limited public fundraising.
• Consider the regulatory complexity—nonprofits often require more robust governance structures, recordkeeping, and public accountability measures.

You should consult legal counsel or a nonprofit advisor before forming either type of entity to ensure you select the right structure and meet applicable tax and legal requirements.

Steps to Establish Each Type of Organization

Starting a Nonprofit:

1. Choose a name and verify availability under state law.
2. Draft and file Articles of Incorporation with the Secretary of State.
3. Apply for IRS tax-exempt status (Form 1023 or 1023-EZ).
4. Create bylaws, appoint a board, and hold an initial meeting.
5. Register for charitable solicitations if you plan to raise donations.

Starting a Not-for-Profit:

1. Define a purpose that serves members or a limited community rather than the public.
2. Incorporate (optional but recommended) and apply for EIN.
3. File for tax exemption under the relevant 501(c) classification (e.g., 501(c)(7) for social clubs).
4. Develop bylaws and governance procedures consistent with your operational scope.

Before filing, consult with a nonprofit attorney or tax professional to ensure proper compliance and classification. You can find experienced counsel through UpCounsel’s attorney network for guidance on formation and IRS requirements.

Frequently Asked Questions

1. Are not-for-profits and nonprofits the same in the eyes of the IRS?
   No. The IRS distinguishes them by purpose: nonprofits serve the public good (e.g., 501(c)(3)), while not-for-profits serve members or private groups (e.g., 501(c)(7)).
2. Can both types receive tax-exempt status?
   Yes, but only nonprofits classified under 501(c)(3) allow tax-deductible donations. Not-for-profits may still be exempt from income tax under other subsections.
3. What happens if a nonprofit makes a profit?
   Profits are permissible if they are reinvested into the organization’s mission, not distributed to members or officers.
4. Do both organizations need to file annual tax forms?
   Yes. Most file IRS Form 990, 990-EZ, or 990-N, depending on revenue. Failure to file for three consecutive years can revoke tax-exempt status.
5. Which is easier to start: a nonprofit or not-for-profit?
   Not-for-profits are generally simpler and less regulated. Nonprofits require formal incorporation, IRS approval, and strict reporting standards.

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