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.

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.

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 furthering its causes.

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 typically preferences about how the donor would like the funds to be spent.

Real estate is one of the most common 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.

If you are setting up a business and you are not sure whether it qualifies as being a not for profit or a nonprofit organization, then you can consult one of our lawyers for help and guidance. To do so, post your job on Upcounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site, and they come from schools such as Harvard Law or Yale. Our lawyers have an average of 14 years of legal experience, and this includes working with prestigious companies like Google and Twilio. For up to date legal news, follow the UpCounsel blog.