Not-for-Profit vs. Nonprofit: Differences Between the Organizations

Nonprofit organizations (or NPOs) are entities operating to serve the public good without attempting to generate profits for a board of directors or additional shareholders.

Common types of nonprofits include NGOs (nongovernmental organizations), private foundations, public charities, and religious organizations. Nearly all charitable organizations operate as nonprofit entities, allowing them to remain exempt from paying taxes as they seek to better social conditions.

To operate in the nonprofit sector, companies must also report their earnings each year to the state and federal government, as well as make their business structure public. This allows for greater oversight of these public-facing organizations. They also have tax-exempt status.

Not-for-profit organizations (NFPOs) are entities created in the special interest of a select group of people without the interest of generating profits.

Common types of not-for-profit organizations include civic leagues, social clubs, and sports clubs. These entities are not tax exempt by default, but they can apply for exemption from income tax, property tax, and sales tax. As such, they might fall under a different category in the broader Internal Revenue Code (or the United States tax code) than nonprofits do.

In general, not-for-profit organizations have less rigorous regulations placed on them by the government than nonprofits do. This is due, in part, to the fact they generally serve a more recreational purpose rather than claim to serve the public good. These organizations also rely less on external donations and fundraising than nonprofits do in many cases.

While both nonprofit and not-for-profit organizations share plenty in common, there are several important key differences to keep in mind. Here are just five of the most prominent areas of distinction:

1. 1. Purpose: Nonprofit entities must dedicate themselves to creating some form of public benefit, whereas no such advocacy is necessary for companies to declare themselves not-for-profit organizations. Nonprofits often rely on charitable contributions for their income, so they can directly influence social causes at the behest of their owners. Not-for-profits, alternatively, might exist solely to serve a recreational purpose for a small group of people.
2. 2. Regulations: While both nonprofit and not-for-profit organizations must remain accountable to their own internal stakeholders, governments generally place more regulations on nonprofits. Both types of organizations might still need to adhere to internal corporate governance bylaws to the state, but nonprofits must also plan for much more meticulous bookkeeping. At the end of each fiscal year, both state and federal governments require them to make their financial status (as well as executive salaries) public.
3. 3. Revenue sources: Nonprofits rely most heavily on fundraising efforts and seeking out partnerships with other entities, whereas not-for-profit organizations might take a wider-angle approach to strategic planning for their finances. For example, a nonprofit social welfare organization can solicit donations from a variety of sources while a not-for-profit might still seek to sell goods for some of its revenue. Still, both must reinvest this income rather than use it to generate profits for board members or shareholders.
4. 4. Status as a legal entity: A nonprofit corporation can operate as a separate legal entity, but a not-for-profit company must operate with the same legal status as a traditional business entity. This is one of the main reasons why nonprofits naturally obtain tax-exempt status but not-for-profit organizations must apply for it.
5. 5. Tax status: The Internal Revenue Service (IRS) grants nonprofits exemption from federal income taxes alongside other perks, but not-for-profits must apply for similar consideration. Both can technically operate without paying federal or state income, sales, or property taxes under the right circumstances.

For-profit business owners pay taxes, reap profits for their shareholders, and file articles of incorporation with their secretary of state. Still, both for-profit small businesses and large corporations can make tax-deductible donations to nonprofits for charitable purposes as well as to not-for-profit organizations for other reasons. Many nonprofits and not-for-profit companies seek out partnerships with for-profit businesses and private individuals, incentivizing them to donate because of this potential tax-deductibility.

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