The not-for-profit and non-profit sectors have always been a major source of confusion for those unfamiliar with their differences – not least because they sound like the same thing.
After nearly ten years of working in the non-profit sector, I can tell you that the not-for-profit and non-profit worlds are different. They have quite different objectives, structures, and rules.
Before you give your time or money to one of these organizations, you must understand the differences.
Let’s examine not-for-profit vs. non-profit in more detail, so you can make an informed decision.
What is a Non-Profit?
A Non-Profit Organization (NPO) is an organization that is not driven by the pursuit of profits; instead, NPOs use their resources to pursue a mission that supports the greater good.
Some common examples of NPOs include:
- Community centers
- Humanitarian groups
- Professional associations
- Research institutes
NPOs are typically established to provide services or advocate for a particular cause, such as providing citizens medical assistance or legal aid.
NPOs rely on donations, grants, and other sources of income not related to selling a product or service.
What is a Not For Profit?
Not-for-profit organizations are not required to pursue any charitable mission but rather focus on providing services or advocacy for their members.
These organizations often rely on membership dues, fundraisers, and special events to generate income.
Some common examples of not-for-profit organizations include:
- Civic organizations
- Social clubs
- Professional associations
- Labor unions
- Trade associations
- Credit unions
Not-for-profit organizations do not distribute profits or dividends to their owners; rather, they use all their income to pursue their mission and further their cause.
Differences Between a Non-Profit and Not-For-Profit
So, What’s the Difference?
When it comes to not-for-profit vs. non-profit, the distinction isn’t always clear.
While some non-profits are required to be not-for-profit, not all not-for-profits are non-profits. To confuse matters further, many not-for-profit and non-profit organizations have similar goals.
Is your head spinning yet?
That’s okay! Let’s break down exactly what differentiates a not-for-profit from a non-profit organization.
Non-profits generally focus on providing services that benefit society and not distributing profits.
Common goals of non-profits include:
- Provide services that benefit society
- Advocate for a particular cause
- Offering medical and legal assistance to citizens
- Pursuing charitable causes
- Supporting research and development of new products or services
- Raising awareness of important issues
Not-for-profits are not required to operate for the public good. While non-profits focus on benefiting the public or advancing a social cause, not-for-profits can serve a more private or personal purpose for their members.
Common goals of not-for-profits include:
- Fostering relationships between members
- Providing benefits and services to members
- Creating a community for those with common interests
- Encouraging cooperation and collaboration among members
While non-profits and not-for-profits operate with a goal or mission in mind, they often differ on what that mission is.
Before diving into not-for-profit vs. non-profit organizations, it’s important to lay out legal liability basics.
A non-profit organization operates as a separate legal entity from its owners; meaning owners are not personally liable when something goes wrong with the business, just like a traditional C corporation.
Not-for-profits operate similarly to general partnerships — there is no legal barrier separating members from responsibility for the group’s actions. In other words, if somebody in the partnership has done something that results in a lawsuit, everyone in the partnership can be held liable.
Non-profit organizations are not taxed on the money they receive from donations, grants, and other income sources unrelated to selling a product or service.
- Donations to non-profit organizations are often tax deductible, meaning donors can claim a deduction on their income taxes.
Not-for-profit organizations are not tax-exempt, and donations are not tax-deductible. NFPs are subject to more strict tax scrutiny than traditional non-profits.
- NFPs must follow the same rules as non-profits but must also be careful not to engage in activities construed as profit-making ventures or private inurement of its members. Failure to abide by these regulations can lead to tax penalties and even dissolution of the organization.
Non-profits do operate to earn revenue. Their income must go toward supporting the organization’s cause. As a non-profit, donor management is absolutely crucial to ensure long-term success.
Not-for-profits, on the other hand, are not allowed to generate revenue. The organization must reinvest all money not spent on operating expenses into operations.
Non-profits not only have volunteers dedicated to their cause, but they also have paid staff. Non-profit organizations usually employ executives, administrators, and other employees for various tasks.
Not-for-profits are not allowed to hire paid staff and can only rely on volunteers. These volunteers may have varying levels of expertise, but they all strive towards achieving the not-for-profit’s mission.
Non-profit organizations generally have a board of directors as their governing body and an executive director responsible for the day-to-day operations.
Other leadership roles may include:
- Program directors
- Financial officers
- And development staff
Not-for-profits are not required to have a board of directors, but many choose to do so.
Other common governing bodies include:
- An executive committee
- A management team
Non-profits can apply for non-profit status from the IRS, which exempts them from paying certain taxes and opens up new avenues for fundraising.
Not-for-profits cannot apply for this same type of tax exemption, as not-for-profit organizations are not eligible to be considered non-profit entities by the IRS.
Similarities Between a Non-Profit and a Not for Profit
Although not-for-profits and non-profits have many differences, the two have some similarities.
Let’s look at not-for-profit vs. non-profit and what similarities these organizations share regarding their mission, organizational structure, activity, and more.
Neither non-profits nor not-for-profit organizations strive to generate profit for their owners. While these organizations may generate profit, they do not use these profits to benefit any individual or corporation.
Both not-for-profits and non-profits strive to improve the lives of those they serve without looking to establish personal wealth.
Both not-for-profits and not-for-profits are exempt from certain kinds of taxes, such as corporate income tax. This exemption allows these organizations to devote more resources towards their mission and helping those in need.
Non-profits and not-for-profits have the same goal of not generating revenue for any individual or corporation.
Both organizations rely on donations, grants, and other sources unrelated to selling products or services to raise money for their cause.
These organizations do not use their revenue to benefit a single person or entity, and any must reinvest any profit the organization generates into the not-for-profit or non-profit.
Both not-for-profits and non-profits rely heavily on help from dedicated individuals to carry out their mission.
While not-for-profits are not allowed to hire paid staff, they still benefit from the work of volunteers who donate their time and effort to support the not-for-profit’s cause.
Non-profits also rely on volunteers, but in addition to volunteers, they may also hire paid employees. These paid employees generally have more expertise in a certain area and can help the non-profit achieve its goals more efficiently.
Both not-for-profits and non-profits have organizational structures that include a governing body, volunteers, and staff.
Non-profits have a board of directors and executive directors. In contrast, not-for-profits may not have a board of directors but can still benefit from the work of an executive committee or management team.
The key takeaway from this article is that not-for-profits and non-profits are not the same, but they both play an important role in society.
Both not-for-profit and non-profit organizations:
- Strive to improve the lives of those they serve without looking to make a profit for themselves or any individual or entity.
- They support themselves through donations, grants, and other sources unrelated to selling products or services.
- Rely heavily on volunteers who donate their time and effort to support their cause.
- and are exempt from certain taxes
Not-for-profit vs. non-profit organizations:
- Not-for-profits cannot apply for tax-exempt status from the IRS, while non-profits can
- Not-for-profits may not have a board of directors, while non-profits usually do
- Not-for-profits cannot hire paid staff, while non-profits can hire employees.
While not-for-profits and non-profits each hold some similarities in terms of mission, taxes, revenue structure, and more, their differences make them unique entities that serve different purposes for the betterment of society.
Ultimately, not-for-profit and non-profit organizations contribute to society by providing services, support, and resources to those in need.
It is important to understand the differences between not-for-profits and non-profits so you can choose which one best aligns with your values and mission.
In conclusion, not-for-profits and non-profits are incredibly important organizations that both focus on positively impacting the world.
As not-for-profits are not eligible to apply for non-profit status, they cannot take advantage of the tax exemptions associated with this designation.
Despite their differences, both not-for-profits and non-profits strive to improve people’s lives without looking to generate personal wealth.
Are there any not-for-profit or non-profit organizations you know that have made a big difference in your community? Leave us a comment below to share your thoughts!
Frequently Asked Questions
There are three types of non-profits: not-for-profit, non-profit, and tax-exempt.
No, not-for-profit organizations are not allowed to make a profit. The money they generate must be put back into the not-for-profit to pay for operational costs, not into personal pockets.
A not-for-profit is any organization that does not make a profit and does not pay dividends or profits to its contributors, owners, or shareholders. Not-for-profits can be public charities, private foundations, or religious organizations.
The two types of Non-profits are not-for-profit and non-profit. Not-for-profits do not seek to make a profit. Instead, they reinvest their money into the not-for-profit to pay for operational costs. Non-profits are eligible for tax exemptions, but not not-for-profits.
The CEO of a non-profit may receive a salary; however, the salary must not exceed a reasonable amount necessary for carrying out the organization’s operations.
Non-profits make money from donations, grants, membership fees, fundraising events, and other sources unrelated to selling products or services.