Non-Profit Vs Not-for-Profit

Updated on April 9, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Non-Profit Vs Not-for-Profit Definition

A non-profit organization is a separate legal entity that can accept donations and is not required to pay income tax as they are created for charitable purposes. While not-for-profit organizations conduct operations and earn profits, they neither distribute those profits nor accept donations.

Non-Profit-vs-Not-for-Profit

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Therefore, they are not separate entities and are not tax-exempt. Rather, they have specified purposes. It is often assumed that non-profit and not-for-profit organizations do not profit from their business activity. That is a misconception. These organizations make profits like any for-profit organization. The only difference lies in the way these profits are used. The basic aspect that differentiates these organizations is the purpose of their existence. They do not work only to earn profits. Rather, their priority is first to serve society.

Non-Profit Vs Not-for-Profit Explained

Let us try to understand in details non profit vs not for profit organization. Both these organizations are similar in many ways. The main characteristic that is same in both is that they do not work for earning profit.

Non-profit organizations are businesses that are granted tax-exempt status. Also, donations made to these organizations are tax-deductible to the entity that makes them. However, they have to open their operations and financial position to the public to know that their contribution has been used effectively. They do not pay any income tax on the money they raise through donations and the money they receive in fundraising. They are also referred to as NPOs.

Non-profit organizations can operate in religious, educational, public safety, or research sectors or purposes. However, these organizations have to generate some public benefit. Another important point to note is that all non-profit organization may work as not-for-profit entity but the the opposite is not possible. A not-for-profit entity cannot work as a non-profit one.

Not-for-profit organizations do not earn profits for their owners. Instead, all the earned money is donated to the not-for-profit organization that pursues the organization’s objectives. These organizations are typically charities or other types of public welfare organizations. They are not exempt from taxation but can apply for tax-exempt status. Donations made to these tax-exempt Tax-exemptTax-exempt refers to excluding an individual's or corporation's income, property or transaction from the tax liability imposed by the federal, local or state government. These exemptions either allow total relief from the taxes or provide reduced rates or charge tax on some items only.read more, not-for-profit organizations may be tax-deductible for the donor.

One thing to note here is that these organizations do not pay sales or property taxes. Looking at the broader picture, both these institutes do not work for profits and are devoted to serving humans and working for the improvement and wellness of society. Therefore, as responsible citizens, we should contribute and push such organizations to improve the community we live in.

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Examples

The concept may be explained clearly with non profit vs not for profit examples.

Example#1

To explain a not-or-profit organization, let us assume that there is a church inside a town. This church has been established as a not-for-profit organization, with the sole purpose of allowing the devotees to visit it and offer their prayer. Thus, being a not-for-profit organization, it will not have to pay any property tax to the local government. However, it will accept any kind of donation in the form of funds, clothing, furniture or anything which can be used inside the church. It can also sell the articles and earn money which may be used for its maintenance and charitable purpose. It does not have to pay any property tax even if the church authority uses it a a storehouse. However, they have to pay taxes on the payroll of their employees.

Example#2

To explain a non-profit organization, let us take the example of Red Cross. It has volunteers and staffs globally which was set us with the humanitarian purpose of saving and protecting survivors of any kind of disaster and emergencies, prevent spread of diseases, providing training regarding healthcare, etc. Thus, it is a charitable institution that has a tax-exemption status. It is an independent entity.

The two non profit vs not for profit examples given above clearly explains the concept.

Infographics

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Key Differences

  • Non-profit organizations work for charitable purposes, while not-for-profit is small groups formed for some common interest.
  • The profits earned are used to manage the expenses for meeting the goal, and no profit is used for personal gain. They do not have employees but volunteers working for them. Similarly, not-for-profit does not aim at making profits. However, whatever revenue is earned is first used to pay off salaries where the remaining money is put back into the business. There are no shareholders
  • Since non-profit organizations have to justify their use, the money accounting standards are much stricter. Not-for-profit organizations do not have to report revenues to the public; hence have less strict accounting policies.
  • A large group of people runs non-profit organizations compared to not-for-profit organizations.
  • Non-profit organizations can form a separate legal entity and are tax-exempt. On the other hand, not-for-profit organizations cannot form a separate legal entity and are not tax-exempt.
  • Charity fundraising is how non-profit organizations can increase revenues. However, not-for-profit organizations increase revenues by sales and profits.

Comparative Table

The table given below explains the main points regarding non profit vs not for profit organization.

Particulars – Non-Profit vs Not-for-ProfitNon-ProfitNot-for-Profit
Definition These are the organizations that work to promote any charitable purpose.Not-for-profit organizations do not distribute their profit to the owners but exist to fulfill their organizational objectives.
ScopeThe scope for these types of organizations is wide.The scope for these types of organizations is comparatively less.
Legal EntityThey can have a separate legal entity.Not-for-profit cannot have the status of a separate legal entity.
Type of OrganizationsThese organizations are involved in art, science, charity, religion, and educational or research purposes.These organizations include a women’s club, sports club, or an association formed by people.
ScaleThese organizations are larger than not-for-profit organizations.Usually, these organizations are smaller than non-profit organizations.
Tax-exempt statusNon-profit organizations fall under tax-exempt status in the U.S. These organizations run like businesses and aim to earn profits. These profits help in both keeping their mission and running the operations. They do not support any members.Not-for-profit organizations do not qualify under the tax-exempt status in the U.S. As defined by the authorities, small groups focusing on sports or any special interests do not qualify as any business entity and hence cannot be qualified under tax-exempt status.
Employee Payment 
These organizations do not have full-time employees but have volunteers.
 
These organizations have full-time employees whose salaries are first paid, and the remaining revenues are put back into the business.
CharterIt receives charters at the state level.It is not chartered either at the state or national level.
Accounting StandardsStandards are stringent as they have to show how they have spent the funding.Accounting policies are less rigorous as they do not have to report revenues compulsorily.
Sources of RevenueDonations, fundraising, membership dues, and funds are the sources of raising money.Gains, profits, and sales add to the money and are not necessarily donations.

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