Starting an organization, you’ll often hear the phrases “nonprofit and “not-for-profit” in conversations. Some people usually use these words without understanding their essence.
It’s easy to assume these two terms mean the same. However, nonprofits and not-for-profits are two distinct types of organizations with different business structures. Each has its own tax implications, governance, and functions.
Knowing the key differences between a nonprofit and a not-for-profit is essential before you start writing your business plan.
Here are the ins and outs of nonprofit and not-for-profit to help you decide which structure is ideal for your venture.
What is a nonprofit organization?
A nonprofit organization is a type of organization with the sole purpose of raising money to support a cause—whether it’s for the environment, social cause, or science and arts.
Charitable organizations don’t act for financial gains. Instead, they can continue to pursue their mission through various fundraising strategies like charity events, online donations, and applying for grants. So because of their objective to further serve the public, they qualify for tax exemptions by the IRS.
The IRS registered 1.6 million tax-exempt organizations in the US, including 501(c)(3) designations from various organizations. Since nonprofit organizations operate for the public, they should create a transparency report so donors can see where their contributions go.
Anyone can start a nonprofit and apply for charitable status with the IRS (Internal Revenue Service), provided you register with the state government.
The registration process is similar to a for-profit organization. When creating a nonprofit business plan, you must name your organization, appoint the board of directors, and choose a legal structure. It can be any of the following; a trust, corporation, association, or limited liability company.
There are millions of informal nonprofit organizations since they don’t earn over $5,000 annually. But having such organizations may have legal liabilities.
Informal nonprofit foundations are not tax-exempt organizations, so better to discuss with an attorney the legal risks of starting an organization.
What is a not-for-profit organization?
Non-for-profit organizations (NFPOs) don’t have to operate for a charitable purpose but to serve their goals. Unlike nonprofits, they seek to make money or gather donations to distribute profit back into their initiatives.
For example, sports clubs may file as recreational or social clubs under 501(c)(7) or 501(c)(3). They may raise funds to cover uniforms, game entry fees, transportation, and club member gatherings.
The IRS allows not-for-profits to apply for tax-exempt status. So they don’t have to pay sales tax and property taxes. However, if you don’t register for a tax exemption, monetary donations made by a person to an NFPO can still be taxed.
Tax exempt organizations under 501(c)(7) have strict guidelines. They can only accept 35% of their monetary income from non-members’ dues, while other income sources are still subject to federal income taxes. So, if you’re a member of a not-for-profit organization, your contributions to your club are not tax deductible.
Registering not-for-profit organizations with the IRS follows the same steps as nonprofits. Though they’re not similar, both organizations need the proper documentation, a bank account, and an Employer Identification Number (EIN).
Differences in their purpose
The primary differences between a nonprofit and a not-for-profit organization are mission and purpose.
The collected money from nonprofit organizations shouldn’t go to its founders or board of directors. Instead, it should go directly to meet targets, operational costs, and most importantly, their beneficiaries—the people to whom you’re donating the money.
Charity foundations advocate for public safety, feeding programs, protection of the environment, or promotion of art, science, or other fields.
Not-for profits, on the other hand, is also for the community, but only for the good of its group members. This group can be, but is not limited to, a social and sports club, trade organization, or social advocacy group.
Not-for-profit groups earn money for their members. Since they raise money not for charitable purposes, they’re ineligible for total tax exemption.
One vital feature to remember: the purpose of an entity’s existence is what separates nonprofits from not-for-profit organizations.
Differences in their goals and objectives
Each year, both organizations develop a strategic plan to set new goals and improve their management approach for the coming years. While some objectives focus on fundraising efforts, others may be more on attracting top talent, volunteers, or new members.
For example, a nonprofit may target writing grant letters to feed more families, help low-income students, or lobby for climate justice. To achieve goals, organizers must prepare ahead of time.
Like nonprofits, not-for-profit organizations also set annual goals. But these goals serve personal interests. In particular, fraternities intend to drive a certain amount of freshmen to recruit for the school year. Or girl scout troops aim to raise money to support their activities.
Differences in their organizational structure
Regarding organizational structure, nonprofits may depend partly on state requirements. Certain areas in the United States allow a specific number of directors or board members. Suppose you want to start a foundation in Texas. The Business Organizations Code would require your organization to have at least three directors, while in California, they’ll only allow you to have one.
Each nonprofit staff and volunteers have distinct job roles and responsibilities like for-profit businesses. These jobs include marketing, human resource, and operations management. And all of them report to the organization’s department head.
When it comes to not-for-profit, the structure is more straightforward. It runs entirely on volunteers and club members to raise funds for the sake of the organization.
Changing legal entity
A for-profit business owner who wants to convert to a nonprofit may face difficulty. The IRS makes the process challenging because they don’t want business owners to avoid paying taxes. Although possible, the approach is similar to starting a charity organization from scratch.
To help you out, here are several key differences between nonprofit and not-for-profit organizations in a nutshell.
- Your reason for nonprofit termination.
- A certified copy of your liquidation plan.
- State your organization’s fair market value.
- Your list of asset recipients if you want to distribute your assets.
You might have personal reasons why you would want to change your legal entity. But converting your corporation poses a lot of obstacles. You’ll have to contact your state and local representatives about the requirements in your jurisdiction.
Conclusion
You wouldn’t want to start an organization while being unaware of the differences between a nonprofit and a not-for-profit. You might end up on the wrong side of the law if you apply for the wrong entity.
To help you out, here are several key differences between nonprofit and not-for-profit organizations in a nutshell.
- The sole purpose of nonprofits is to give back to society and the environment; Not-for-profits support a small cause, activity, or group community.
- Nonprofits can have a separate legal entity; Not-for-profits cannot have a separate legal entity.
- Money donated by an individual to a nonprofit is tax-deductible; the IRS can’t deduct taxes on the person’s tax returns.
- Not-for-profit organizations may have to pay income tax depending on some circumstances; A nonprofit can be a tax-exempt organization.
Paid employees, volunteers, or a mixture of both, are responsible for the operations of nonprofit and not-for-profit organizations.
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