What's the Difference Between Nonprofit vs. Not-for-Profit?
We answer just about every question you might have about these two types of organizations.
Forming a business or organization can be crazy-making. There are many classifications to choose from and tax implications for each. So how do you know which to choose?
We’re here to talk about all things nonprofit vs. not-for-profit — because these are two pesky little terms we throw around without knowing what they mean. The confusion stops here.
Read on to understand the similarities and differences between the two types to better prepare you for forming your own organization.
Is Not-for-Profit the Same as Nonprofit?
No, not-for-profit is not the same as nonprofit. It's easy to use these terms interchangeably, but they have different meanings pertaining to business.
A nonprofit is a charitable organization that serves the public good and that is approved as tax-exempt by the IRS. A not-for-profit is an organization that primarily serves to benefit its members and may or may not be tax-exempt by the IRS.
Similarities Between Nonprofit and Not-for-Profit
Before diving into the differences, let's start with how the two are similar. Both types of organizations can make money, but they can only use that money to further the organization's mission and goals or to keep it running. In addition, no owner or member can receive any portion of the organization's profits; income needs to be used to benefit the public or the members.
Another similarity is that both types of organizations can receive donations. But for donors, determining if your donation is tax deductible depends on how the IRS classifies the organization. You can see if a particular organization is tax-exempt using the IRS’s search tool.
Differences Between Nonprofit and Not-for-Profit
There are quite a few differences between nonprofits and not-for-profits. Lucky for you, we cover them right here. Reference our list for an at-a-glance overview, and read on for more details on each difference.
Approved nonprofits are classified under the IRS tax code for 501(c)(3) organizations, while not-for-profits can be classified as any number of 501(c) organizations, like a social welfare, labor, or agricultural organization or a business league. (Take a look at just how many classifications of 501(c) organizations there are.)
While nonprofits and not-for-profits can be exempt from federal taxes, state tax exemptions can vary.
One of the main differences between nonprofit vs. not-for-profit is that a nonprofit is required to benefit the public or advance a social cause (like public colleges and organizations like Make-A-Wish and ASPCA). If a nonprofit is approved as a 501(c)(3), it is a charitable organization.
A not-for-profit is not required to benefit the greater good; instead, it only needs to benefit the interests of the organization’s members (like your local tennis club, private colleges, and real estate boards).
How They’re Run
Nonprofits are often run like corporations, except they don’t have shareholders. They typically first register as a “nonprofit corporation” at the state level before applying for federal 501(c)(3) status. Like a corporation, a nonprofit can make a profit, but remember that its profits can only be used to benefit the causes and people it serves (this can include paying its employees).
Not-for-profits are typically not run like corporations because their goal often does not involve making a profit; they usually exist to serve their members on a more recreational basis, and, often, they are run by volunteers.
Note that these are generalizations — not hard-and-fast rules. Every organization is run a little differently.
Nonprofits are generally large organizations, while not-for-profits are often smaller — another typical difference between nonprofit vs. not-for-profit. The reason for this goes back to the intention that we mentioned earlier. Furthering a cause and benefitting groups of people inherently means that a nonprofit organization needs to be large enough to fulfill a need. Because not-for-profits serve only their members, they act on a smaller scale.
Another key difference between nonprofit and not-for-profit is that a nonprofit is a legal entity separate from its owners (like a corporation), while a not-for-profit does not have its legal entity. Not-for-profits act like a general partnership without legal separation between the organization and the founding members.
As we mentioned earlier, both types of organizations can receive donations. But a nonprofit’s revenue comes from donations, grants, and memberships, while a not-for-profit’s revenue is mostly from sales and membership dues. That doesn’t mean that a not-for-profit can’t accept donations, but they probably won’t make up the majority of its revenue.
Due to their tax-exempt status, nonprofits have much more government oversight than non-tax-exempt not-for-profits. All nonprofit revenues must be reported to the IRS, while not-for-profits generally don’t need to do this.
Additionally, nonprofits are prohibited from donating to political candidates and are restricted from lobbying activities.
Nonprofit vs. Not-for-Profit: How to Choose
When you’re forming an organization and wondering how to choose between a nonprofit or not-for-profit, the most important thing to consider is who it is intended to serve. Is the vision to benefit the public as a whole and fulfill a larger charitable mission? Or is the vision to be a member- or community-based organization in which proceeds are used to benefit the member themselves?
These are crucial questions because you must prove that your organization is formed exclusively to advance a cause or benefit people to be approved as a nonprofit. You'll probably need to choose a not-for-profit designation if you can't meet that criteria.
How to Switch Between Types of Organizations
You’re not likely to switch from a not-for-profit to a nonprofit, or vice versa, because (1) many of these organizations are already tax-exempt or under the same tax umbrella of 501(c), and (2) they serve different purposes on varying scales.
But you might be wondering how to change from a nonprofit to a for-profit company or the other way around. As you might assume, nonprofit versus for-profit organizations are quite different. Though they’re both classified as corporations, their goals aren’t the same.
For-Profit to Nonprofit
Here’s what you’ll need to do to switch from a for-profit to a nonprofit:
- Ensure your business is incorporated and/or amend the company’s articles of incorporation.
- Adjust the company’s mission and value statements to clarify that the new nonprofit organization is focused on furthering a social cause.
- Apply for tax-exempt status.
- Determine what’s needed on the state level.
Nonprofit to For-Profit
Here are the basics for switching from a nonprofit to a for-profit:
- Send a statement of nonprofit conversion to the IRS, notifying them of the reason for the nonprofit status termination, the fair market value estimate of the organization's assets, who will receive those assets if they're distributed, and the liquidation plan.
- Determine what’s needed on the state level.
- File a final tax return with the IRS.
In both situations, it’s best to get legal counsel and talk with your accountant before starting the transition process.
Understanding the ins and outs of nonprofit vs. not-for-profit is challenging, but we hope that with our guide, you can now differentiate between the two and know which is best for your organization.
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