Nonprofit vs Not for Profit: What’s the Difference?

Nonprofits and not-for-profits are two types of organizations that seem similar on the surface but have some key differences. As a small business owner or entrepreneur, understanding these differences is important when choosing a structure for your organization. In this article, we’ll break down what defines each type of entity and how they compare.

What is a Nonprofit?

A nonprofit organization operates for the purpose of serving the public good rather than generating profits Nonprofits aim to provide a social benefit and further a mission that improves society in some way

Some examples of nonprofits include:

• Charitable organizations like food banks and homeless shelters
• Religious institutions like churches or synagogues
• Educational institutions like private schools and universities
• Arts organizations like museums, orchestras, and theaters
• Advocacy groups that promote a particular cause or issue

Nonprofits are established as legal entities and granted tax-exempt status by the IRS under section 501(c)(3) of the tax code. This means they do not have to pay federal corporate income tax on any money earned through donations grants, or other fundraising activities.

In exchange for tax exemption, nonprofits must disclose their financial statements and operating activities to the public. The rationale is that the public deserves transparency on how their donations are being utilized to serve the nonprofit’s mission.

What is a Not-for-Profit?

A not-for-profit organization (NFPO) is one that does not earn profits for its owners All revenue earned must be retained by the organization for its self-preservation and sustainability,

Not-for-profits differ from nonprofits in some key ways:

• They do not need to provide public benefit. An NFPO can simply exist to serve its own interests or those of its members.

• They have more flexibility in their governance. While nonprofits are tightly regulated, not-for-profits can be structured in whatever way best suits their needs.

• They may not qualify for 501(c)(3) status. NFPOs often fall under other sections of the tax code depending on their purpose.

• Donations to NFPOs are not tax deductible. Only 501(c)(3) nonprofits can offer this incentive for donors.

Some examples of not-for-profits are social clubs, recreational sports leagues, homeowners associations, and advocacy groups that lobby for special interests.

Key Differences Between Nonprofits and Not-for-Profits

While nonprofits and not-for-profits are similar in that they do not distribute profits, there are some important ways in which they differ:

Purpose

• Nonprofits must provide a clear public benefit through their programs and activities.

• Not-for-profits can be formed to serve the private interests of their members.

Tax treatment

• Nonprofits are exempt from federal income tax under section 501(c)(3).

• Not-for-profits may qualify under other sections of the IRS code depending on their purpose.

Donor deductibility

• Contributions to 501(c)(3) nonprofits are tax deductible for the donor.

• Donations to not-for-profits are not deductible.

Profit distribution

• Nonprofits are prohibited from distributing profits to individuals. All money raised must go back into the mission.

• Not-for-profits can distribute leftover revenue to members, but this must be outlined in their governing documents.

Governance

• Nonprofits have stricter oversight on their governance structure and activities.

• Not-for-profits have more flexibility in how they are structured and managed.

Lobbying and political activities

• Nonprofits are restricted in how much lobbying and political campaigning they can do.

• Not-for-profits have more freedom to engage in lobbying and support political candidates.

How to Choose Between Nonprofit vs Not-for-Profit

When starting a new organization, weigh the following factors carefully to decide whether nonprofit or not-for-profit status makes the most sense:

• Purpose – Is your mission focused on providing a public benefit? If so, nonprofit may be the better choice.

• Fundraising needs – Do you need tax-deductible donations? 501(c)(3) status unlocks this fundraising advantage.

• Flexibility – Do you want less oversight on governance and operations? Not-for-profit offers more autonomy.

• Lobbying plans – Will you engage in lobbying or political activities? Not-for-profits have more latitude here.

• Tax treatment – Nonprofit exemptions can provide greater tax savings if you have revenue subject to federal tax.

• Business activities – If earned revenue is a significant part of your model, not-for-profit may be better suited.

• Converting later – It’s easier to go from not-for-profit to nonprofit than vice versa. Consider if you may want to convert.

Creating an organization that accomplishes your goals while complying with laws and regulations can be complex. Consult with legal and financial advisors to determine if nonprofit or not-for-profit status is your best option. Analyze the pros and cons in the context of your specific mission, activities, and sources of funding.

With careful planning upfront, you can establish the ideal structure to support a sustainable and impactful organization for years to come. Whether nonprofit or not-for-profit, any business that contributes value to its community is worthy of recognition. Focus on operating ethically and toward your intended purpose, and your legal status will fall into place.