To the uninitiated, the terms nonprofit and not-for-profit may seem identical—in fact, they’re often used interchangeably. Despite their similarity in name, however, nonprofit and not-for-profit businesses are distinct types of organizations, with different tax treatments, governance rules, and missions.
Non-profit vs. not-for-profit
Nonprofits and not-for-profit organizations are similar at their core: both eschew the pursuit of profit above all else. However, not-for-profit organizations differ in their scope.
If you’re looking to form a smaller, more local organization for a recreational purpose, a not-for-profit may be right for you. However, if your goals are more ambitious and centered on the advancement of a social cause and public benefit, a nonprofit may be a more suitable choice.
What is a nonprofit?
A nonprofit organization is a business that receives special tax-exempt status from the US Internal Revenue Service (IRS) if its mission and purpose is to advance a social cause and offer a public benefit. That benefit can vary depending on the type of nonprofit, but generally speaking, qualifying organizations will have a religious, charitable, scientific, public safety, educational, or animal welfare focus.
Nonprofit organizations do not pay income tax, property taxes, or sales tax. Examples of business entities in the nonprofit sector include charitable organizations, private foundations, most colleges and universities, houses of worship, and research institutions. Nonprofits are sometimes also referred to as non-stock corporations, or 501(c)(3) organizations (depending on the subsection of the tax code’s Section 501 that provides for their financial status).
Nonprofit organizations are similar to for-profit businesses in that they aim to maximize their revenues; however, nonprofits are prohibited from putting the profits they generate toward anything other than advancing the organization. That means there are no shareholders, and owners may only receive compensation in the form of salaries.
To ensure they are meeting these requirements, nonprofits must make their financial and operating information public so that potential donors can see where their gift might go.
What is a not-for-profit?
Not-for-profit is a broad term for organizations that do not generate profit for their owners. All money generated by a not-for-profit business must be reinvested back into running it.
Unlike nonprofits, not-for-profits are not required to operate specifically for the benefit of the public or the advancement of a social cause. A not-for-profit can simply operate to serve the goals or special interests of its members. For example, a recreational sports club can operate as a not-for-profit.
Like nonprofits, not-for-profits must apply to qualify for tax-exempt status with the IRS. However, money donated to not-for-profit organizations is not tax deductible.
Nonprofits vs. not-for-profits: similarities and differences
Nonprofits and not-for-profits both enjoy tax-exempt status from the IRS. However, they have several key differences in scope and how each serves the broader community.
Purpose and mission
- How they’re similar: Neither nonprofits nor not-for-profits operate with the goal of generating profits for ownership.
- How they’re different: While not-for-profits can be formed and run solely to meet the goals of their members, nonprofits are driven by charitable purposes and must seek to advance a social cause and benefit the public good.
- How they’re different: Like a traditional C corporation, a nonprofit organization can operate as a separate legal entity from a business owner. By contrast, not-for-profits are similar to general partnerships in that they enjoy no legal separation from the members involved. However, some states, like New York and Florida, allow not-for-profits to incorporate as their own legal entities while retaining some state tax exemptions.
- How they’re similar: Both nonprofits and not-for-profits are exempted from certain kinds of taxation by the IRS.
- How they’re different: Donors to nonprofits can deduct their gifts on tax returns; individuals who give money to a not-for-profit are not entitled to tax deductions. Nonprofits themselves are also subject to stricter tax scrutiny than not-for-profit organizations. For instance, they are required to report revenues, while not-for-profits are not.
- How they’re different: Nonprofits run with the purpose of maximizing revenues for the causes they support. Not-for-profits do not run with the goal of earning revenue, and any money earned has to go back into the organization itself.
- How they’re different: While nonprofits may have paid staff (often including a president or CEO), not-for-profits are run by volunteers.
Nonprofits and not-for-profits vs. for-profit organizations
Unlike for-profit ventures, nonprofits and not-for-profits are not concerned with generating profits for owners. That said, nonprofits are more similar to their for-profit counterparts than are not-for-profits.
Both nonprofits and for-profit organizations seek to maximize revenues. Whereas for-profits may distribute revenues above the profit line to shareholders, nonprofits must recycle those earnings back into the organization. Not-for-profit organizations simply seek to generate enough money to keep the lights on.
Switching organizational types
Some organizations and businesses may initially form as a nonprofit or not-for-profit, but later decide to convert to a for-profit venture, or vice versa. While the process can be difficult, it’s possible to convert from one type of business entity to another.
Converting from nonprofit or not-for-profit to for-profit
To convert from a tax-exempt organization like a nonprofit or not-for-profit to a for-profit venture, you will need to notify the IRS in writing with a “statement of nonprofit conversion.” The statement must include:
- The reason for your conversion
- A certified copy of a liquidation plan, which explains what will happen to the nonprofit’s assets upon conversion. Are you rolling assets into the for-profit venture? Make sure to incorporate them into your estimate of the organization’s fair market value.
- A list of all asset recipients and the assets to be distributed.
- An estimate of the fair market value of the organization.
Converting from for-profit to nonprofit
Converting a for-profit venture into a nonprofit is a bit more complicated than the other way around. The IRS makes this process more complex to discourage for-profit businesses from converting simply to avoid paying taxes. To execute the conversion, you will be required to:
- Write a mission statement explaining how you plan to serve society as a nonprofit, including charitable purposes.
- Write and adopt bylaws through a vote of an appointed board of directors. You may choose to adapt your existing corporate bylaws to reflect your new nonprofit mission, or completely rewrite them. You may also choose to roll existing board members into the new nonprofit, or appoint new ones.
- File articles of incorporation with the state secretary of state office.
- Follow certain state-specific rules for conversion. In New York, for example, you will need to create a separate nonprofit organization, then merge it with your for-profit venture into a single new nonprofit organization.