What’s the difference between nonprofit and not for profit?

The difference between nonprofit and not for profit is more than a question of grammar. These are two distinct types of organizations with unique legal requirements and functions.

What they have in common is that neither is created for the purpose of generating profit. Although both a nonprofit organization (NPO) and not for profit organization (NFPO) do receive revenue, that income is used to further the organization’s mission rather than be distributed to shareholders.

If you are interested in forming a philanthropic organization, it’s important to understand how these two types of organizations are defined and what their limitations are.

Nonprofit mission

What does nonprofit mean? Nonprofits have a mission to serve the public good, whereas a not for profit organization is created to serve the social welfare of a select group of individuals.

Nonprofit organizations are centered on any of these missions:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• National or international amateur sports competition
• Prevention of cruelty to children or animals

Not for profit mission

There are fewer not for profit organizations than nonprofits in the United States, and they tend to be both smaller in size and narrower in their missions. While an NPO does have a target audience and purpose, an NFPO can be limited to the membership of a specific group.

Not for profit organizations often include:

• Youth sports leagues
• Political or social advocacy groups
• Trade associations or unions
• Special interest or hobby groups

Nonprofit tax status

The most significant benefit of organizing as a nonprofit or not for profit is tax exemption.

NPOs apply to the IRS to be granted 501(c)3 status, which means they are:

• Exempt from paying federal income tax on donations or other revenue sources
• Able to receive a tax-deductible donation from individual and corporate donors
• Qualified to apply for exemption from state and local property and sales tax

If you’re wondering, “can an LLC be a nonprofit, and does the nonprofit tax status still apply,” well, it is possible. However, for an LLC to become a nonprofit, you will need to comply with numerous requirements. Plus, you will have to be a subsidiary of a more established nonprofit organization.

Not for profit tax status

Not for profit organizations also apply for qualifying tax exempt status and a nonprofit EIN number by the IRS, but the major difference is that they are not able to offer tax deductibility as a benefit to their donors. Because NFPOs do not entirely meet the strict requirements of a 501(c)3 nonprofit in terms of either who they serve or their involvement, donors are still taxed on any money they give.

The most common types of NFPO designations under the IRS are:

• 501(c)4 – Civic leagues, social welfare organizations, local associations of employees, homeowners associations, and volunteer fire companies
• 501(c)5 – Labor, agricultural, and horticultural organizations or unions
• 501(c)6 – Business leagues, chambers of commerce, real estate boards
• 501(c)7 – Social and recreational clubs

Nonprofit and not for profit political involvement

Nonprofits have strict rules preventing them from endorsing any politician or political movement, severely limiting their legislative involvement.

Most NFPOs under other 501(c) designations are freely able to:

• Publicly endorse legislation
• Participate freely in lobbying to help pass or repeal legislation
• Engage in political campaigning, including endorsing candidates
• Focus on promoting social or political change

However, there may be limits on political involvement imposed for groups accepting federal grants or aid.

More differences between nonprofit and not for profit organizations

Tax status and political activity are two of the primary differences between an NPO and an NFPO, but that’s not all. More distinctions to note include:

• Financial and operations reporting – NPOs need an open-books policy on their finances and structure. This is both to prove adherence to IRS regulations and provide potential donors a report card on how their money is being used.
• Legal entity and charter – NPOs are set up using the same process as for-profit businesses, by incorporating as a separate legal entity in their state and registering in other states in which they will operate. This involves several steps and requirements, including setting up a nonprofit board of directors, bylaws, and a legal name.
• Staffing and structure – NPOs have formal organizational structures, including a nonprofit board of directors, paid employees (often with roles and titles similar to those found in for-profit companies), and volunteers. NFPOs are usually run by volunteers and may have little formality in smaller groups.
• Dual operations – While an NFPO cannot operate as an NPO, the reverse is not true. A nonprofit organization can operate a not for profit organization, event, or activity.

Apply online

So what’s the difference between nonprofit and not for profit? There are a number of variables, but with a high reliance on donations to fund their missions, most charities benefit from using the nonprofit business model. Corporate and individual donors place a high value on tax deductibility, and their support will help you make the world—or your corner of it—a better place.

Do you want to know how to start a nonprofit organization? If you’re ready to learn more about starting a public charity, simply fill out this form to apply for a nonprofit online right now.

Sources:

• Wall Street Mojo. Non Profit vs Not for Profit. https://www.wallstreetmojo.com/non-profit-vs-not-for-profit/

• Charity Navigator. Types of Nonprofits. https://www.charitynavigator.org/index.cfm?bay=content.view&cpid=1559

• IRS. EO Operational Requirements: Endorsing Candidates for Public Office. https://www.irs.gov/charities-non-profits/eo-operational-requirements-endorsing-candidates-for-public-office

• Congressional Research Service EveryCRSReport.com. Lobbying Regulations on Non-Profit Organizations. https://www.everycrsreport.com/reports/96-809.html

• UpCounsel. Not for Profit vs Nonprofit: Everything You Need to Know. https://www.upcounsel.com/not-for-profit-vs-nonprofit