To the uninitiated, the terms “nonprofit” and “not for profit” may seem identical—in fact, they’re often used interchangeably. Throw in the term “for profit” and things can get mighty confusing.
Despite their similar names, however, all three are distinct types of organizations with different tax treatments, governance rules, and missions. Here’s how to untangle these terms and choose the right organizational structure for your enterprise.
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What is a nonprofit?
A nonprofit is an organization designed to advance a social cause or provide a public benefit—things like education, charity, research, or animal welfare. A nonprofit can’t make profits to share with owners or investors. Instead, any income the nonprofit generates goes right back into funding its mission.
If you run a nonprofit, you get tax benefits like exemptions from income tax, property tax, and sometimes sales tax. In exchange, you need to stay transparent about how your money is spent.
Nonprofits can take many forms, from colleges and research institutions to charities and houses of worship. In the US, they’re often called 501(c)(3) organizations, referring to the tax code that governs their status. While they operate like businesses in many ways—raising money and managing budgets, for example—they exist to serve the public good, not shareholders.
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 organization must be reinvested back into running it.
Unlike nonprofits, not-for-profit organizations 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-profit organizations must apply to qualify for tax-exempt status with the Internal Revenue Service (IRS). However, money donated to not-for-profit organizations is not tax deductible.
What is a for-profit business?
A for-profit business exists to make money. That’s its main goal, whether it’s selling products online, providing services, or building solutions people need. The profits it earns don’t just go back into the business. They can also go to owners, shareholders, or investors as rewards for their investment and effort.
Most ecommerce businesses fall into this category. Opening an online store, selling wholesale, and selling on marketplaces are all considered for-profit ventures.
For-profit businesses pay taxes on their earnings and are owned by individuals or shareholders who benefit from those profits. The owners can take profits as personal income or reinvest them into the business for growth.
Nonprofit vs. not-for-profit vs. for-profit businesses
Nonprofits and not-for-profit organizations both enjoy tax-exempt status from the IRS. However, they have several key differences in scope and how each serves the broader community. We’ll also compare them to for-profit businesses here so you can see how they differ:
Purpose and mission
How they’re different
The biggest difference between all three comes down to the mission.
A nonprofit’s mission is to focus entirely on advancing a social cause. They’re built to serve the public good and can’t distribute profits to owners or shareholders.
By contrast, for-profit companies are driven by the goal of making money for their owners and shareholders. While they may serve a community or offer a valuable service, their ultimate aim is to generate a profit.
Not-for-profit organizations fall somewhere in the middle. They can be formed and run solely to meet the goals of their members or owners (as in, they don’t need to advance a social cause), but the profits must be fed back into the business.
How they’re similar
All three types of organizations aim to offer value—whether that involves providing a service, creating a product, or serving a community. They can’t exist without providing value to a sufficient number of people.
Liability
How they’re different
Interestingly, a nonprofit organization can operate like a traditional C corporation, where the organization is a separate legal entity from the owner. By contrast, not-for-profit organizations 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-profit organizations to incorporate as their own legal entities while retaining some state tax exemptions.
In for-profit businesses, the owners or shareholders are also protected from personal liability, typically through structures like LLCs or corporations. However, if the business incurs debt or legal issues, the organization itself is responsible, not the individual owners—unless they’ve personally guaranteed a loan or are involved in illegal activities.
How they’re similar
All types of businesses—whether nonprofit, not for profit, or for profit—carry some level of liability. This means that if the organization gets into legal trouble, it can be held responsible for debts or damages. However, the owners or leaders of these organizations typically aren’t personally liable for the organization’s debts (depending on the structure, like an LLC or corporation), meaning their personal assets are usually protected.
Tax treatment
How they’re different
Nonprofits enjoy special tax-exempt status, meaning they don’t have to pay federal income taxes on revenue related to their charitable mission. They also may be exempt from some state income taxes, property taxes, and even sales taxes, depending on where they’re located.
Like nonprofit organizations, not-for-profits don’t distribute profits to owners, but they aren’t necessarily tax exempt. They might still have to pay income taxes, depending on how they’re structured and what kind of activities they’re engaged in.
For profits don’t have the luxury of tax-exempt status. They must pay taxes on the money they make. This includes federal income taxes, state income taxes, and even sales or property taxes, depending on the type of business and location.
How they’re similar
All organizations—nonprofits, not for profits, and for profits—are required to pay taxes in some form, but the specifics vary based on their structure and purpose. Both nonprofits and not-for-profit organizations are exempted from certain kinds of taxation by the IRS.
Revenues
How they’re different
Nonprofit organizations run to maximize revenues for the causes they support. Not-for-profit organizations do not run with the goal of earning revenue, and any money earned has to go back into the organization itself.
For-profit businesses operate solely with the goal of generating revenue, which they can then share among owners and shareholders or invest back into the business.
How they’re similar
For all three types of organizations, bringing in revenue is essential to staying in business and covering expenses. Plus, they all typically generate revenue by offering something of value.
Employees
How they’re different
While nonprofits may have paid staff (often including a president or CEO), not-for-profit organizations are often run by volunteers. Salaries in nonprofits may be lower than in for-profit organizations because the focus is on using resources for the public good.
For profits have employees just like nonprofits and not for profits, but the main difference is their purpose is to turn a profit for owners and shareholders. They often can offer higher salaries, bonuses, and stock options to attract and retain talent.
How they’re similar
All organizations rely on employees (or, more accurately, people), but nonprofits and not for profits may focus more on mission-driven work with potentially lower pay, while for profits often have more financial flexibility and can offer higher compensation.
Switching organizational types
Some organizations and businesses may initially form as a nonprofit or not-for-profit organization, 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 via 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 do the following:
- 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 and then merge it with your for-profit venture into a single new nonprofit organization.
What model should you choose for your business?
Choosing whether to start a nonprofit, for-profit, or not-for-profit organization completely depends on your goals, values, and what you want to achieve. Luckily, you can start any of these businesses with little to no money.
If your primary aim is to make a positive impact through education, charity, or another social cause, a nonprofit might be the way to go. Nonprofits are designed to serve the public good and they offer tax benefits, but they also come with stricter rules about how profits are used and what you can pay yourself.
If you want to build something that benefits a specific group or community without the heavy, often restrictive requirements of a nonprofit, a not-for-profit might be a good fit. Not-for-profit organizations don’t distribute profits to owners, but they have more flexibility in how they operate.
Alternatively, if your goal is to make a profit and start a business that can generate income for you (like an online store) a for-profit business is a no-brainer. This model offers the most freedom when it comes to managing finances and compensation, but it does come with the added responsibility of paying taxes on your profits.
Once you’ve decided which model works best for you, don’t forget to register your business, get any necessary business licenses, choose a name for your business, and create a business plan.
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Nonprofit vs. not for profit FAQ
Are nonprofits tax exempt?
Businesses that meet IRS requirements and are exclusively for charitable, scientific, educational, or other mission-oriented purposes are exempt from income tax, property taxes, and sales tax.
What are two disadvantages of a nonprofit organization?
To retain their tax privileges, nonprofit organizations can only perform certain functions and pursue certain goals. Additionally, nonprofits can’t use the revenue they generate for anything other than continuing to operate the business.
What is an example of a not-for-profit organization?
Examples of not-for-profit organizations include recreational sports teams, social clubs, and some trade and professional associations.
Is it easier to manage a nonprofit or a for profit?
It depends on your goals. Managing a for-profit business can be simpler in some ways because the financial structure is straightforward. A nonprofit can often be more complex due to the strict regulations and reporting requirements. Both have their challenges, but for-profit businesses tend to have more flexibility and fewer rules to follow.
Does a CEO get paid in a non-profit?
Yes, a non-profit CEO is usually paid a salary. However, they do not receive a share of profits, which are reinvested into the organization.
