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