Perhaps one of the very first questions a passionate community builder must ask themselves is: nonprofit vs not-for-profit? The difference between a nonprofit and a not-for-profit is a subtle one but can be a crucial decision.
This guide provides a comprehensive overview of these distinctions including the pros and cons of both types of organizations.
Let’s dig in.
What is a Nonprofit Organization?
When you think of a charitable organization, you are most likely thinking of a nonprofit.
A nonprofit is an organization that does not generate revenue to benefit shareholders, but rather to improve its community or the public good in some way. Funds raised are reinvested into the nonprofit to improve services, enrich staff, and develop new programs.
In most communities, nonprofits work alongside public and government services to provide programs and initiatives to help people thrive. For example, a city will provide public schools to educate all local children, but a nonprofit will partner with them to offer before and after-school care to support working parents.
Organizations like churches, hospitals, universities, and childcare providers are often nonprofits. These groups operate with mission statements that guide their work. Each organization answers to a volunteer-led, appointed board of directors who elect officers.
The largest international nonprofit is United Way Worldwide. This nonprofit generates billions in donations to support education, income, and health programs around the world.
Nonprofits receive special exemptions from paying taxes from the Internal Revenue Service. Organizations must apply for and be approved for the Application for Recognition of Exemption from the IRS. Once this process is completed, your nonprofit will be set up as a 501(c)(3) and can offer the perk of tax-deductible gifts to your donors.
Other special benefits from a 501(c)(3) nonprofit designation may also include a special rate for postage and exemption from income, sales, employment, and property taxes.
What is a Not-for-Profit Organization?
Now, it may seem like every charitable organization you can imagine sounds like a nonprofit. However, a subtle nuance designates some community groups as technically a not-for-profit organization instead.
Like nonprofits, a not-for-profit also exists to support a specific social, recreational, environmental, or other community need. A not-for-profit operates without generating income to enrich the wealth of any investors, just like a nonprofit. But importantly, a not-for-profit does not need to contribute to public community benefit or fundraise as much as possible to support a greater community need.
For example, a not-for-profit organization may be a local sports club. Your membership fees are used to pay staff and improve the facilities. These fees do not result in individual wealth for anyone in particular or serve the public by offering free sports teams for kids. Instead, the fees are priced to support the operation of the sports club only.
Some examples of not-for-profits include:
Professional associations for realtors, executives, etc.
Fraternities and sororities
Hobbyist social clubs (yacht clubs, hunting groups, master gardeners)
Some not-for-profits do end up contributing to the public good or providing a free service that is open to all. But completing and reporting on these efforts is not required, unlike with a nonprofit.
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What is the Difference Between a Nonprofit and a Not-for-Profit Organization?
You might be wondering: what is the difference between a nonprofit vs not-for-profit? Examining a few of the key differences below can help you determine which is the best direction for your idea.
Purpose and Mission
One of the largest distinctions between a nonprofit vs. not-for-profit is their basic purpose. A nonprofit exists to serve a specific mission, which may be as lofty as ending homelessness or more localized, like helping to rehabilitate a nearby waterway.
Nonprofits are typically open to all in the community. These organizations welcome participation and donations from a wide audience of supporters.
Community sports clubs and parent-teacher associations are two examples of not-for-profit organizations. A not-for-profit is often called a social club, serving only the needs of its limited membership.
While a not-for-profit does not serve a broad purpose, its narrow focus allows it to nimbly and efficiently meet the needs of its specific membership. Without the option of not-for-profits, many small clubs, centers, and groups which enrich people’s lives would not be sustainable.
Tax Exempt Status
Most nonprofits earn 501(c)(3) status as part of the initial establishment of the organization. This recognition from the IRS allows nonprofit organizations to claim tax exemptions on income, employment, property, and sales taxes.
With a 501(c)(3) status, donations to the organization are now tax-deductible. Without this tax-exempt status, nonprofits may miss out on other organizations which can offer tax deductions to their donors.
Not-for-profit organizations also may be eligible for some tax exemptions, though they are not as extensive as those available from a 501(c)(3). Many not-for-profit organizations apply for a 501(c)(7).
Depending on the type of organization, some not-for-profits receive exemptions for sales, property, and employment taxes. However, tax deductions for donations and special postage rates are not available for 501(c)(7) groups and other similar not-for-profit organizations.
One simple way to differentiate a nonprofit vs. not-for-profit is the scope of its efforts. Picture this: a nonprofit resembles a business, while a not-for-profit is more like a social club.
Nonprofits balance diverse sources of funding to raise as much money as possible to devote to their mission and purpose. A nonprofit organization often runs programs and services to generate additional income to devote to its cause. Think about Habitat for Humanity, which not only builds homes for the needy but also sells home furnishings from donated and salvaged goods.
A not-for-profit operates with a much narrower perspective. In order for an organization to qualify as a 501(c)(7), it must accept a limited membership. An example of this is a fraternity that allows membership only from males attending a specific university.
Sources of Funding
Successful nonprofit organizations juggle several diverse streams of funding, which may include:
Program or service revenue (charity shops, youth camps, membership fees)
Because nonprofits operate more like a business than not-for-profit organizations, these many different funding sources help nonprofits achieve financial stability.
If a nonprofit relies too heavily on grant funding, not winning the grant could toss the entire organization into severe uncertainty. And depending on a single fundraising event for your operating capital can become a disaster if the event must be canceled.
However, a not-for-profit organization usually relies heavily on one specific source of income. Membership dues are the most common form of revenue for a 501(c)(7) organization.
Because nonprofits must serve a broad audience, they also must answer to that same broad audience.
Most nonprofits file the IRS form 990 which provides a detailed analysis of the organization’s financial and operational status. A 990 details the nonprofit’s sources of income, executive leadership and governance, and current assets.
Successful nonprofits know an important part of fundraising is reporting back to donors on how their donations were invested. Transparency is an essential part of a nonprofit organization building trust within its broad audience of supporters.
However, a not-for-profit organization shoulders a much smaller burden of transparency.
Because the scope of the 501(c)(7) is much smaller, only the limited membership of the social club would need to be kept informed. The 990 form required for not-for-profit organizations can be much simpler as well.
What are the Similarities Between a Nonprofit and a Not-for-Profit Organization?
Many similarities exist between nonprofit and not-for-profit organizations. The most important commonality is both organizations’ desire to serve beyond self-interests.
For-profit organizations strive to enrich individual shareholders and pay out large dividends. Nonprofit and not-for-profit organizations pay out a different kind of dividend, through healthier, stronger communities.
Within both types of organizations, those who operate the organization can be either volunteers or paid staff. It is much more likely for a nonprofit to support paid staff, but some not-for-profit organizations may also support employees.
While the tax exemptions for a nonprofit 501(c)(3) organization and a not-for-profit 501(c)(7) social club are different, both receive benefits for devoting themselves to their communities.
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The Pros and Cons of a Nonprofit Organization
Like any type of business endeavor, there are pros and cons to a nonprofit organization.
Pros of Founding a Nonprofit Organization
Nonprofits successfully contribute to so many of the essential needs of our global society, like public health, education, and fine arts. Some nonprofit organizations have swelled to enormous capacity, with the ability to save lives and change the trajectory of our world.
Remember the Ice Bucket Challenge? That tremendous exposure and massive fundraising from this viral challenge resulted in huge strides in research and awareness for the devastating disease of ALS.
Nonprofit organizations also provide meaningful employment for thousands of people around the globe. Everyone from a hands-on childcare provider to the Chief Financial Officer for a multinational charity works for a specific mission. As nonprofits expand their capacity, tools like grant management systems are indispensable in juggling their dynamic needs.
Choosing to establish a nonprofit opens you to several helpful tax benefits. The 501(c)(3) tax exemptions allow you to devote as much income as possible to your mission, instead of paying things like higher postage rates and property, sales, and income taxes.
Cons of Founding a Nonprofit Organization
However, founding a nonprofit organization involves much more work than a not-for-profit organization. Be prepared for a lengthy legal process to begin a nonprofit, including applying for your 501(c)(3) status.
Nonprofits must complete an annual 990 form and maintain a board of directors and legal bylaws for their organization. Think of running a nonprofit like running a business.
The Pros and Cons of a Not-for-Profit Organization
A not-for-profit provides a much lower barrier to entry for community members passionate about a specific need. However, this limited scope delivers a smaller overall result.
Pros of Founding a Not-for-Profit Organization
Hobbyists may establish a yacht club or hunting association as a 501(c)(7) to bring together like-minded people to enjoy their shared interests. And not-for-profits can be as simple as that!
Because the scope and audience of a not-for-profit are so much more limited, the organization does not need to be as transparent about all of its operations to the entire community.
All of these points lend a more casual feeling to a not-for-profit. While an IRS form 990 is still required, this paperwork is often much simpler for not-for-profit organizations.
Cons of Founding a Not-For-Profit Organization
A not-for-profit organization usually does not support many formal job opportunities and relies on a strong core of volunteers.
While a 501(c)(7) is often a much simpler exempt status to achieve, not-for-profit organizations enjoy much fewer tax benefits.
Wrapping Up: Nonprofit vs Not-for-Profit Organizations
The difference between a nonprofit and a not-for-profit comes down to the basic mission and purpose of the organization.
Does the group wish to teach local students to read? This sounds like a nonprofit. Or is the organization striving to bring together people with a shared hobby? A group like this is most likely a not-for-profit.
When it comes to nonprofit vs not-for-profit organizations, other major distinctions include:
Sources of funding
There are pros and cons to both nonprofit and not-for-profit organizations. Explore both options closely to set your organization up for the greatest chance of success.