Nonprofit vs Not-For-Profit
Nonprofit and not-for-profit organizational types can look similar in some cases but they have significant differences in their activities. Non-profit organizations focus on achieving a mission and benefiting the public good. They are nonprofit because their earnings cannot benefit private shareholders, members, or individuals. In contrast, not-for-profit organizations are not necessarily engaged in the public good as their primary goal. If not-for-profit organizations use their earnings to benefit members or individuals, they may be required to pay taxes on those benefits similar to for-profit companies.
What Is a Nonprofit Organization?
A nonprofit organization is a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code that operates to pursue a mission for the benefit of society at large rather than the interests of private individuals. As they are not allowed to distribute any money to individuals, they generally have nonprofit corporate structures. This means that their earnings cannot be used for the benefit of private shareholders or members. When nonprofit corporations earn revenue, they are expected to use it to further their nonprofit purpose. To qualify for nonprofit, an organization must be organized for nonprofit purposes and operate to fulfill its nonprofit mission. Examples of nonprofit organizations include government agencies, charities, churches and hospitals, colleges, schools, and other nonprofit groups that do not distribute earnings to owners.
What Is a Not-For-Profit Organization?
Not-for-profit organizations do not earn a profit, and they may not distribute any of their earnings to members, managers, or affiliates. Instead, all money saved or earned is used to pursue the organization’s stated goal, future operations and to expand the organization. However, not all not-for-profit organizations follow this rule. If not all surplus revenue is used for the stated purpose of the organizations, not-for-profits must pay taxes on their earnings. In some cases, they may avoid taxes by operating as a Section 501(c)(4) or 501(c)(6) organization. These types of not-for-profit are not technically not for profits because they distribute revenue to not-for-profit members. In terms of structure, not-for-profits are not like the traditional corporation. They do not have share capital or shareholders, but they can offer non-cash benefits to members in exchange for payment of membership dues. Examples of not-for-profit organizations are volunteer groups, social clubs, nonprofit companies, or organizations with special tax statuses.
Key Differences Between Nonprofit and Not-For-Profit
In a lot of ways, nonprofit and not-for-profit organizations are similar. They both have purposes, structures, missions, goals, etc. However, they do have some key differences that affect how they operate.
In terms of their purpose, nonprofit organizations are created to carry out their nonprofit purpose. This is to provide something of value to the community or society. On the other hand, not-for-profit organizations can be created with any purpose that is not illegal or immoral.
Board of Directors and Membership
Both not-for-profit and nonprofit organizations have boards of directors. However, not-for-profits do not have to have members. While nonprofit organizations must be member or donor driven. They cannot distribute funds to their shareholders and not every person associated with the organization is a member.
Non-profit organizations are not taxed on their income or earnings. In contrast, not-for-profits are not exempt from tax on their income. This is because not-for-profit organizations must return any earnings that they do not use to further their mission. Because of this, not-for-profit organizations usually have not for profit structures.
A non-profit can be chartered as a nonprofit company or nonprofit association, which means they need to follow nonprofit corporate law. Whereas not-for-profit organizations are not required to operate as nonprofit organizations do.
Restrictions on Usage
Nonprofits are not allowed to distribute any income, or profits to members of the nonprofit, and cannot operate for private gain. A not for profit company can sell goods or services that relate to their not for profit purpose, but they must not distribute any profits from the sales.
Which Organization Should I Set Up?
Nonprofit and not-for-profit organizations are not the same. They do not have the same goal or purpose, which means what one does will not always work for the other. If your goal is to provide community services, then nonprofit organizations are the most effective form of organization. They are also not taxed on their income, which allows them to make more money. On the other hand, not-for-profit organizations can be created with any purpose not illegal or immoral. If your organization wants to make a substantial amount of money, then you should set up a not-for-profit company. This gives you the freedom not only to make money but also to distribute it as you see fit. However, both organizations must abide by legal requirements and restrictions that they must not distribute any income, or profits to members.
Nonprofit and not-for-profit organizations are not alike. Their purpose, structure, legalities, limits, and benefits are different. They are not interchangeable despite some similarities. What works for not-for-profit organizations might not work for nonprofit companies. This is why it is important to know not only the difference between not-for-profit and nonprofit companies but also when to use one or the other. It’s not easy starting a company, especially if you’re not sure how your business will be taxed or where your money will go. For not-for-profit companies, you can always consult lawyers who are knowledgeable in not-for-profit laws. They will help guide organizations to success. For nonprofit companies, finding a lawyer is not necessary. They should not be confused with not-for-profit companies, either. Just remember the difference between not-for-profit and nonprofit organizations to avoid problems with your company later.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.