Key Takeaways

  • Nonprofit organizations focus on broad missions like education, religion, or charity and typically qualify for 501(c)(3) tax-exempt status.
  • Not-for-profits often serve more limited or mutual benefit purposes (e.g., member clubs) and may qualify for different 501(c) classifications.
  • Both types reinvest surplus income but differ in tax treatment, governance, and activities.
  • Nonprofits often have formal boards and higher compliance requirements than not-for-profits.
  • Understanding IRS classification and legal structure is essential before starting either type of 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.

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.

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.

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.

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.

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.

Frequently Asked Questions

  1. What is the main difference between a nonprofit and a not-for-profit organization?
    The primary difference lies in their purpose: nonprofits serve public or charitable purposes, while not-for-profits typically serve member or mutual benefit purposes.
  2. Can a not-for-profit organization qualify for tax exemption?
    Yes, but not under 501(c)(3). Not-for-profits may qualify under other IRS codes like 501(c)(4), 501(c)(6), or 501(c)(7), depending on their activities.
  3. Do both nonprofits and not-for-profits reinvest profits?
    Yes. Both reinvest surplus income back into the organization rather than distributing it to members or stakeholders.
  4. Can a not-for-profit become a nonprofit?
    In some cases, a not-for-profit may evolve into a nonprofit if its mission changes to serve the public good and it meets IRS 501(c)(3) requirements.
  5. Do donors receive tax deductions for donating to not-for-profits?
    Typically no. Only donations to 501(c)(3) nonprofits are tax-deductible for the donor.

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