Non-Profit vs Not-for-ProfitDifferences You Need to Know Between the Two!
The main purpose of starting and running a business is to generate profits.
However, a business is sometimes made for charitable purposes, meaning not for profit.
Though if that were the case, it’d be a stretch to call them a business right?
So let’s refer to them as organizations for now.
These organizations are made for the purpose of advancing social or charitable causes such as relief of the poor, the distressed, or the underprivileged.
Or it could be the advancement of education or science, etc.
For these organizations, making any profit (if any) is only secondary because the advancement of their causes comes first.
We refer to these entities as non-profit organizations.
Because of their charitable nature, non-profit organizations have the privilege of being exempt from taxes.
That includes exemption from income tax, mainly because non-profit organizations usually barely make any profits at all.
Aside from that, they can accept donations as legal entities.
These donations that non-profit organizations receive are tax-deductible on the part of the donor.
They are not to be confused with not-for-profit organizations as they’re a different type of entity.
Unlike non-profit organizations that are always made for charitable purposes, a not-for-profit organization can be made to serve a specific purpose for its members.
What makes them not-for-profit is that any profit they earn is not available for distribution.
Rather, they are to be fully utilized to serve the purpose that these not-for-profit organizations are made for.
Sounds confusing right? Non-profit and not-for-profit… they sound interchangeable.
So to make it easier to differentiate them, let’s discuss what makes these two types of entities different from each other.
What is a Non-Profit Organization?
A non-profit organization is a legal entity that is made for the primary purpose of a charitable, scientific, religious, or public safety cause.
A non-profit organization can have one or more of such causes.
Due to their non-profit nature, they are exempt from paying federal income taxes.
Additionally, any donations that a non-profit organization receives are tax-deductible on the part of the donor.
Another privilege that non-profit organizations enjoy is that they can be free from tax liabilities for the funds that they raise, as long as they are used for purposes that benefit the general public.
That is not to say that non-profit organizations don’t earn profits.
They sometimes do but unlike your usual for-profit business entity, non-profit organizations cannot distribute their earnings to their founders or other private individuals.
If they do, they risk losing their tax-exempt status.
Rather than doing that, any earnings in excess of operating expenses go back to the non-profit organization itself to support its cause.
Some of the common examples of non-profit organizations include the following:
- Arts and cultural organizations (e.g. museums, theatre groups, music foundations, etc.)
- Medical organizations (e.g. hospitals, public clinics, etc.)
- Faith-based organizations (e.g. churches, mosques, temples, synagogues, etc.)
- Humanitarian organizations (e.g. social welfare groups, salvation houses, etc.)
- Labor unions
- Educational organizations (e.g. schools, universities, colleges, etc.)
- Foundations for charitable purposes
- Chambers of commerce
While just the tax-exempt status is already desirable, it’s not that easy to qualify as a non-profit organization.
One must understand that a non-profit organization is service-driven rather than money-driven. They are not expected to make money for their founders (or anyone for that matter).
Non-profit organizations must always make their financial and operational information available for public scrutiny.
This is to ensure that any donations they receive are being effectively used to further their cause.
What is a Not-for-Profit Organization?
A not-for-profit organization is an organization that is made for the benefit of a certain community or group of people.
That’s not to say that they can’t be for the benefit of the general public though.
Some not-for-profit organizations are made to serve beneficial public purposes after all.
Unlike non-profit organizations, not-for-profit organizations are not automatically tax-exempt.
Also, any donations that they receive aren’t automatically tax-deductible on the part of the donor.
They can only enjoy these privileges if they apply and qualify for them.
The trade-off is that not-for-profit organizations have more freedom in the purpose that they serve.
Aside from charitable causes, they can be made for the exclusive benefit of their members.
For example, some not-for-profit organizations are made for recreational activities.
However, just like with non-profit organizations, not-for-profit organizations still cannot distribute any of their earnings to their members or founders.
Any earnings in excess of operating expenses are funneled back to the not-for-profit organization for the advancement of its purpose or improvement of its facilities.
Some examples of not-for-profit organizations include the following:
- Charities and foundations for a specific cause such as planting and saving trees, advocating animal rights, or promoting responsible wastage
- Public welfare organizations such as providing shelter or food for the homeless
- Sports clubs that cater exclusively to their members
- Associations such as professional associations
Some not-for-profit organizations require membership fees (initial and annual) from their members to maintain operations.
For example, a sports club may require its members to pay a membership fee to gain access to its athletic facilities.
Some non-profit organizations also conduct fundraising events for charitable purposes such as “a basketball exhibition match for a cause” in which all (or some) of the proceeds go toward a specific charitable institution.
Non-Profit vs Not-for-Profit
Before we discuss the differences between the two, let’s discuss their similarities.
First, both non-profit and not-for-profit organizations are service-driven rather than money-driven.
Instead of having profit generation as their main purpose, they have their respective causes as their primary purpose.
This means that members and founders of both types of organizations shouldn’t expect to make money out of them.
In fact, both non-profit and not-for-profit organizations don’t distribute any of their earnings to their members, founders, or any other private individuals.
Rather, any earnings in excess of operating and other expenses go back to the organization for the advancement of its cause, funding of future operations, or improvement of facilities.
With that out of the way, let’s proceed with their differences.
A non-profit organization is a separate legal entity from its members and founders.
This means that a non-profit organization can buy, own, or dispose of properties.
It can also enter into contracts. Lastly, it can sue and be sued in a court of law.
Any assets owned by a non-profit organization can only be used to serve the purpose of the organization.
Unlike in the case of a for-profit business where its assets are distributed to creditors and shareholders in the event of liquidation, the assets of a non-profit organization can only be transferred to another non-profit organization.
In contrast, a not-for-profit organization is not a separate legal entity. As such, it does not have the same legal rights as a non-profit organization.
Any assets of a not-for-profit organization are held in trust on behalf of its members.
If the organization liquidates, its assets will be distributed among its members after all liabilities are satisfied.
Non-profit organizations are eligible for tax exemption, provided that they can prove that their purpose is to advance a social or charitable cause.
The funds they raise through donation drives are tax-deductible on the part of the donor.
They are also not liable for taxes for the donations they receive on the condition that they fully utilize them to advance their social cause.
To retain their tax-exempt status, non-profit organizations have to make their financial record available for public scrutiny. This is to ensure that they uphold their cause.
On the other, not-for-profit organizations are not automatically qualified for tax exemption.
This is because a not-for-profit organization can be made for a private purpose such as exclusively catering to the needs of its members.
The donations they receive may also be not tax-deductible on the part of the donor.
However, a not-for-profit organization can apply for tax-exempt status if it has the qualifications.
Source of funds
Non-profit organizations mostly source their funding from donations, though they can have other sources too.
It could be in the form of grants, sponsorships, membership fees, etc.
Since non-profit organizations cannot rely on revenue to finance their operations, they have to secure a steady flow of finances.
This is why some non-profit organizations combine their funding sources.
On the other hand, most not-for-profit organizations source their funding from membership or subscription fees.
They can also source their funding from fundraising events, or through the sale of merchandise or services.
Lastly, they may receive donations.
Purpose of formation
Non-profit organizations are always formed with the advancement of a public/social cause in mind.
Hence, during the formation of one, the founders have to declare what public/social cause/s the non-profit organization will serve.
In subsequent years, the organization has to make its financial and operational records available for public scrutiny.
This is to ensure that the organization is serving its purpose.
In contrast, while a not-for-profit organization may be formed for the benefit of the general public, it can also be formed to only serve a select group of people.
For example, a not-for-profit organization may only serve the needs of a certain community.
Also, not-for-profit organizations are not required to publish their financial records.
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Internal Revenue Service "Charities and Nonprofits" Page 1. June 7, 2022
Norwich University Online "Article 7 Key Differences Between Nonprofit and For-profit Organizations" Page 1 . June 7, 2022
Cornell Law School "Non-profit organizations" Page 1 . June 7, 2022