When exploring mission-driven organizations, the terms not-for-profit and nonprofit are often used interchangeably, but they aren’t exactly the same. Understanding the distinction between not-for-profit vs nonprofit can help clarify the purpose, structure, and financial operations of these entities. Whether you’re considering forming an organization, donating to a cause, or working in the sector, knowing how these models differ is key to making informed decisions.
One important point up front: neither not-for-profits nor nonprofits have owners or shareholders. Instead, they are structured to serve a mission, their members, or the public good, and any surplus revenue is reinvested back into the organization.
What Is a Not-for-Profit Organization?
A not-for-profit organization is a type of entity classified under the IRS’s list of 501(c) tax code, with the exception of the 501(c)(3) classification. These organizations do not strive to generate profits for the benefit of owners or private individuals—because they do not have owners. Instead, the objective of a not-for-profit is to raise money to operate the organization for the benefit of its members. Any excess revenue (budget surpluses) raised by a not-for-profit is reinvested in the organization to further benefit its members.
Not-for-profit organizations can apply for and usually receive tax-exempt status, meaning they do not need to pay property tax or income tax. However, donations, contributions, and dues collected by not-for-profit organizations are not always tax-deductible for donors.
Not-for-profit organizations serve their members, often with recreational, hobby-related, or community-oriented purposes. Some common examples of not-for-profit organizations include social clubs, hobbyist groups, sports leagues, fraternities and sororities, veterans’ organizations, and homeowners’ associations. Even credit unions are considered to be a type of not-for-profit entity. Your local Elks Club, VFW Post, and children’s baseball league are likely classified as not-for-profit organizations.
Not-for-profit organizations typically have a fairly simple structure. A volunteer board of directors often runs them, and they rely on the participation of other volunteers to carry out events or organize their operations.
Depending on their specific IRS classifications, some not-for-profit organizations have a few financial reporting requirements. Not-for-profit organizations must primarily maintain thorough financial records to maintain their tax-exempt status. Not-for-profit organizations are also often required to make financial records and reports available to their members to maintain internal accountability and transparency. There are guidelines to follow. However, they are not nearly as stringent as the requirements of nonprofit organizations.
What Is a Nonprofit Organization?
A nonprofit organization is classified as a 501(c)(3) organization by the IRS. Nonprofit organizations exist to serve the public good through a charitable mission. Like not-for-profits, nonprofits do not have owners or shareholders, and they do not distribute profits to private individuals. Any budget surpluses are reinvested into the entity to further its mission.
Examples of nonprofit organizations include educational institutions, healthcare organizations, religious organizations, charitable foundations, and charities. Some famous examples include United Way, St. Jude Children’s Research Hospital, The Nature Conservancy, American Red Cross, Smithsonian Institution, Wounded Warrior Project, and Habitat for Humanity.
Other than their unique treatment and altruistic use of excess revenue, nonprofit organizations operate similarly to for-profit corporations. They have complete organizational structures made up of both paid employees and volunteers. Each nonprofit is led, overseen, and directed by a board of directors.
Nonprofit organizations are required to operate with financial accountability and transparency. They must maintain accurate and thorough financial records to generate publicly available financial statements (which include a statement of financial position, a statement of activities, a statement of cash flow, and a statement of functional expenses). Additionally, nonprofits must file an annual Return of Organization Exempt From Income Tax (Form 990) with the IRS for additional transparency and the maintenance of the organization’s tax-exempt status.
Several watchdog organizations (such as CharityWatch, Charity Navigator, GiveWell, and GuideStar) exist solely to hold nonprofit organizations accountable for their missions. These organizations grade and rate nonprofits by scouring nonprofit financial records for accuracy, transparency, and expense categorization while evaluating spending and revenue to determine the percentage of donations directly spent on mission-related activities.
What Are the Major Differences?
Nonprofits and not-for-profits share many similarities, such as their ability to accept donations and have a tax-exempt status. Additionally, both types of entities do not exist to generate profits for their owners.
While these types of organizations have many similarities, the following key differences separate and distinguish nonprofits from not-for-profits:
- Mission and Objectives – Not-for-profit organizations have missions and objectives focused on benefiting the organization’s members. In contrast, nonprofit organizations have missions and objectives aimed at benefiting the public good by serving others. While nonprofits aim to raise as much money as possible to maximize their impact, not-for-profits typically only aim to raise enough money to achieve a limited goal, such as hosting an event, purchasing team jerseys, or covering neighborhood maintenance expenses.
- Financial Reporting and Disclosure Requirements – Financial reporting requirements differ significantly between nonprofits and not-for-profits. Nonprofit organizations (i.e., 501(c)(3)) are required to publicly disclose their financial reports and file a public IRS Form 990. Not-for-profit transparency requirements vary between the different types of tax-exempt entities (i.e., 501(c)(4), 501(c)(5), 501(c)(6), 501(c)(7), and so on). While they might be required to disclose financial information to members, they are not typically required to make their financial information available to the public. It is important to note that state and local laws might impose separate financial reporting rules and regulations on tax-exempt organizations.
- Tax Implications – Nonprofit and not-for-profit organizations apply for tax-exempt status with the IRS, meaning they do not owe taxes on the funds they earn. However, not all organizations can offer the ability for donors to make tax-deductible donations. For the most part, only donations and charitable contributions made to 501(c)(3)-categorized nonprofits are tax-deductible for donors.
- Organizational Structure – Nonprofits and not-for-profits have different organizational structures. Nonprofits operate like regular, for-profit businesses. They have a board of directors and paid employees. Volunteers are responsible for running not-for-profit organizations.
- Legal Entities – Only nonprofit organizations can legally form subsidiary entities or create joint ventures with other organizations or agencies. A legal entity can either be a nonprofit or a for-profit corporation.
Common Misconceptions
People have many misconceptions about nonprofits and not-for-profit entities, including what it means to be nonprofit or not-for-profit, the similarities between the organizations, and their differences.
Being classified as not-for-profit or nonprofit does not mean the entity generates no revenue. It simply means that all profits (or budget surpluses) are reinvested in the organization, instead of being paid out to shareholders, investors, or owners. While they don’t focus on generating profits for the benefit of owners, nonprofit organizations do have traditional employees, and they are paid a salary or hourly wage. While nonprofit entities themselves do not use profits in the same way as for-profit entities, they can, under certain circumstances, legally form for-profit subsidiaries to handle certain aspects of the organization’s operations or to shield the nonprofit from liability.
It’s also important to remember that donations to charitable organizations are classified differently depending on the type of tax-exempt organization to which they are given. Donations to nonprofits are considered tax-deductible, providing an income tax reduction to donors. However, not all donations or dues paid to not-for-profit organizations are deductible.
Expand Your Understanding of Organizational Entities at Unity
While these tax-exempt organizations are similar, nonprofits and not-for-profits have distinguishing features and differences that are important to understand, especially if you plan to found or operate a charitable organization. For those interested in business, whether for-profit, nonprofit, or not-for-profit, Unity Environmental University has a robust and supportive online learning program and career support services designed for future leaders in the green and sustainable business sector.
While earning a Bachelor of Science in Sustainable Business Management, a 90-credit Applied Bachelor of Science in Sustainable Business Management, or a Sustainable Master of Business Administration in Climate-Ready Business, students learn the ins and outs of different business entities and structures, while developing a wide array of skills and technical expertise needed to excel in the field.
