Not for Profit vs Nonprofit vs Profit: What's the Difference?
Not for Profit vs Nonprofit vs Profit: What's the Difference?
The biggest distinction between Nonprofits and Not-for-Profit (NFPO) organizations is that nonprofits are created specifically for charitable purposes and must in some way benefit the overall public good, whereas Not-for-Profits do not need to ‘do public good’ and are created to help the Not-for-Profit’s member rather than the community at large.
And while both organizational structures do enjoy exempt tax status and are given 501(c)(3) status by the IRS on income and property, Nonprofits can accept tax-deductible donations and other gifts and nonprofit donations are tax deductible for donors, Not for Profit organizations can not accept donations nor can any donations be tax exempt for the individuals giving the donations.
If all of this sounds a tad confusing, don't worry. We'll explain everything in more detail below. Because as similar as these organizations sound, there are a few key differences to know before you decide which is best for your specific organizational needs.
What is a Nonprofit and Can it Profit?
The most important aspect in understanding what nonprofits are as far as legal discourse is that non-profit organizations work for charitable purposes and must in some way benefit the overall public good. This means the nonprofit must be specifically established to address social, educational, charitable, or community needs of some kind, or to 'make the world a better place.' They often include charities, foundations, hospitals, educational and religious organizations.
Some of the better known nonprofit organizations include St. Jude Children's Research Hospital , Habitat for Humanity, Make-a-Wish Foundation, ASPCA, Cancer Research Institute and Doctors Without Borders. As you can see, each has a specific mission driven purpose or cause they are raising money for in order to help those within that group. This can include charities in all sorts of areas like education, health, environmental conservation, poverty alleviation, arts and culture, human rights, and more. In fact, you can literally set up a legal charity online to save goldfish and start fundraising if you really wanted!
Believe it or not many of the USA top learning universities are actually nonprofits, a few with many campus locations. Universities like Massachusetts Institute of Technology, Harvard University and Stanford University are all nonprofits as well as many others around the country. This means tuition costs, financial aid and other fees the university collects aren't taxed by the IRS, but that also means all revenue must be used to further the mission of the school and no stakeholder is allowed to benefit in any way.
But of course the legalities of a nonprofit are always a concern and need to be understood. One thing to note here is that a nonprofit can be its own entity. Meaning it is legally its own separate legal entity from its founders, members, and supporters which means any responsibilities are its own and can't fall to the people involved in the charity.
Nonprofits are also governed or run by a board of directors or committee that oversees the organization adheres to its mission statement and that it is operating in full compliance with the laws that govern nonprofits. One of these laws is that financial and operating information must be accessible to the public at any time and all funds must be traceable to be sure they are being used in accordance with theses laws. You can usually find these documents online if you search their business website.
Then there is the the fact that they are tax exempt. That means they do not need to pay taxes to the IRS for any contributions, fees or pay taxes on land or assets. But the conditions of this tax status also requires them to use all money not needed to pay for the organization functioning be used for furthering their mission statement. Under no circumstances may an individual or other entity be given resources for reasons other to run the organization. Anyone connected with the organization other than paid employees can not benefit in any way from any income the nonprofit collects. Nonprofits can disperse to anyone connected with it including its board or trustees.
One strange rule about nonprofits is they also can not use any of their donations to pay their employees! Rather, the organization can use certain grants, or it needs to generate profits in some way to cover their paid employees. This could be selling swag with their logos or something similar, to selling memberships to the organization. But they can't use donations to pay salaries, it must come from some form of profit.
What is a Not-for-Profit and Can it Profit like a Nonprofit?
While both nonprofits and for-profit organizations seek to maximize revenues in some way, not-for-profits collect revenues to help the organization or those that are part of their organization and its missions, whether or not it benefits the public or not is of no consequence. For example, you may have a band that wants to travel and do shows all over the world. If they were smart, they could register as a not-for-profit and all of their revenue can be tax deductible as long as they use it to buy equipment or for food and travel expenses. Obviously once they make it big, they're going to wan to switch to a for-profit model!
Foundations, social clubs, religious organizations and Trade and professional associations are all examples of not-for-profits. Baby2Baby, The Solutions Project, As You Sow and DreamSpring are all not-for-profits that you may recognize.
While both non-profits and not-for-profit organizations are both eligible to receive exempt tax status as far as the IRS is concerned, all organizations that are formed as nonprofits get exempt status whereas not all not-for-profits do. Furthermore, donations given to a not-for-profit can not be written off as a tax gift for the person making the donation as you can with a donation made to a nonprofit. In addition, all the funds or profit the not-for-profit collects must be invested back into running the organization and can not be dispersed to members of the organization. The money or profit can be spent on training, tools or other resources, or simply to further their missions.
The structure for a not-for-profit is similar to a nonprofit as can be legal entities and they have a board of directors or trustees governing the organization and making sure it is sticking to its mission statement. They also must adhere to the same legal compliance that nonprofits due as far as being completely transparent with their finances, and a not-for-profit's financial statement are open to the public usually in the form of a Form 990 that you can often find somewhere online on their website if you do a search.
Deciding on which is ‘best’ is really dependent on what exactly your specific organization plans to operate, its mission, goals, funding sources, and legal requirements in your jurisdiction. To say definitively that one business structure is better than the other is impossible without learning a lot more about your business. But to make things easier, we’ve created a simple ‘fact sheet’ that should get you off to a solid start deciding. Once you have an idea of which you think would be best for your particular business, it would be best to consult with your attorney on the specifics.
Which is Better for Business - A Nonprofit or Not for Profit Organization?
- Flexibility in revenue generation: Not-for-profits have the freedom to create products and services that they can profit on They can even be involved in business ventures with other for-profit businesses as long as they are still focused on their mission and stick to their mission statement.
- Potential for hybrid models: Some not-for-profits can be set up to operate as both a business for profit and a charitable entity, this gives them the freedom to make large profits, but it can also make it more difficult to achieve a tax exempt status.
- Ownership structure: Depending on how you end up structuring your organization, it is possible for stakeholders to benefit indirectly from its activities. Think like a club or gym, you can use the facilities for free, but you still can’t take any profit out of the organization.
- Tax implications: Not-for-profits do not automatically receive tax free status like a nonprofit does. This all depends on how the organization is structured and operates.
- Perception: The term "not-for-profit" can be confusing to people that are familiar with the term ‘nonprofit’ which may make it more difficult to do fundraising to fund your not-for-profit.
- Clear charitable intent: The term "nonprofit" is widely accepted to mean the nonprofit is working to better the world in some way and does not use any of the profit donated to it for their own gain. Nonprofits are seen by the general public as having a strong focus on serving the public good.
- Tax-exempt status: Nonprofits usually have a higher likelihood of qualifying for tax-exempt status due to the way they are structured and their core mission.
- Stronger nonprofit identity: Using the term "nonprofit" when you’re doing fundraising or awareness for your organization brings to the forefront of a donors mind a charitable organization that is working to improve the world and not make a profit doing it. This can really impact donations and people willing to volunteer.
- Limited business activities: Nonprofits usually don’t engage in normal profit business activities, so they really don’t sell anything other than maybe their own merchandise to cover employee costs. This is due to their mission statement that normally specifies the organizations is set up to help and not engage in business profit.
- Funding sources: Nonprofits heavily rely on donations, grants, and fundraising efforts, which while might seem more restricted than other financial profit models, also means it may take more work to fund the organization.
When all is said and done, it will totally depend on your own organizations goals and business structure.
The Key Differences Between Not for Profits vs. Nonprofits - Start Learning!
Here's a table outlining the similarities and differences between not-for-profit and nonprofit organizations. Although some of these may seem small or similar, the two organizational structures are still legally different.
Key PointsNot-for-Profit OrganizationsNonprofit OrganizationsMission FocusCentered around a specific mission or cause.Primarily established to fulfill a specific mission that benefits society.Profit ObjectiveAim to generate revenue but does not distribute profit to owners or shareholders.Not focused on making profit for owners or stakeholders but contributions.Tax-Exempt StatusMay or may not have tax-exempt status, depending on local laws.Often eligible for tax-exempt status.Revenue SourcesCan earn revenue from operations,donations, grants, and fundraising.Rely on donations, grants, and fundraising efforts to support their mission.Volunteer EngagementAlmost entirely reliant on volunteers.Often rely on volunteers to assist.Ownership StructureMay have owners or stakeholders who may benefit indirectly from the organization.Do not have traditional owners or shareholders; resources are reinvested in the mission.Board of DirectorsTypically have a board of directors or trustees to oversee operations.Governed by a board of directors to oversee operations.TransparencyMust maintain transparency in financial operations.Must maintain transparency in financial operations.Social ImpactNot a concern but impacts its members positively.Emphasize their role in contributing to the greater good and public welfare.
At the end of the day, there really are more similarities than differences between nonprofits and a not-for-profit. Both can 'profit' from business activities, collecting donations and a host of other financial resources. Also, both not-for-profits and nonprofits serve the public good in some way, although a not-for-profit keeps that profit within their organization more than nonprofits do. And both organizational structures allow for tax exemption and the freedom to become entities so no board members or trustees can be held responsible, and both must be completely transparent with all their financial records.
There can definitely be some confusion when it comes to nonprofit vs not-for-profit organizations as many thing are similar, even their names! But legally speaking, their are still some minor key differences in the way each decides to do business and what they do with any fundraising or profit that's created. Where as nonprofits are more closely related to larger charities and therefore always conduct their business in a socially responsible way to do good for all involved with their mission, not-for-profits are often smaller and conduct their business activities for the members of the group or a smaller impact on society.
If you would like to see how we can improve your fundraising capabilities for your nonprofit of not-for-profit, sign up for a free demo here. We have a plethora of resources and tools to get your charity or foundation a head start. Plus we have a huge database of free learning opportunities online to help your business further.