Not For Profit vs Nonprofit

Oct 09, 2023 

Disclaimer: Although we don’t provide legal advice, we can assist you with your filings and corporate documents and help you apply for 501(c)(3) status under the Internal Revenue Code (IRC). Visit our service pages to find out more about what Pearl Solutions can offer. 

You know what a nonprofit or nonprofit organization is, but do you know what a not-for-profit organization is? And, more importantly, do you know the difference between not for profits vs nonprofits? 

Although it may appear that there is little difference between all of the different classifications, especially nonprofit vs charity, that’s not the case. Those key differences usually come down to an organization’s purpose, audience, operational structure, and tax status. 

Keep reading to learn more about these types of organizations and how they differ.

Not-For-Profit Organizations

The name gives you some information about these organizations; not-for-profit organizations are, like nonprofit organizations, not organized for profit in the way that for-profit organizations are. 

But what does it mean when people talk about not-for-profit vs nonprofit organizations? 

First, let’s look at what a not-for-profit organization is. According to the U.S. Chamber of Commerce

“…not-for-profits are not required to operate for the benefit of the public good. A not-for-profit can simply serve the goals of its members. A good example is a sports club—the purpose of the club is to exist for its members’ enjoyment. These organizations must apply for tax-exempt status from the IRS, including exemptions from sales tax and property taxes. That also means that money donated by an individual to an NFPO cannot be deducted on that person’s tax return.”

Not-for-profit organizations that achieve tax-exempt status usually qualify under a section other than 501(c)(3) of the Internal Revenue Code (IRC), which is the section under which most traditional nonprofits qualify. For example, social clubs usually receive tax-exempt status under section 501(c)(7). 

Nonprofit Organizations

Most organizations that we consider to be nonprofit organizations achieve their tax-exempt status under section 501(c)(3). These organizations: 

“…must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

As you can see, a few differences between not-for-profit organizations and nonprofit organizations are already evident in those descriptions: why the organizations are formed, what the organizations can do, etc. 

Tip: Learn more about the Professional Nonprofit Development, Creation, & Strategy services we provide at Pearl Solutions.

Charitable Organizations

But what about charitable organizations? Aren’t charities and nonprofits the same thing? We certainly hear those words used interchangeably in everyday conversation. However, those words shouldn’t be used interchangeably because some nonprofits are not considered to be charities. 

This may not seem like something worth noting, but the way an organization is classified has important tax implications and informs what restrictions are placed on the organization in terms of how it operates. 

So, what is a nonprofit organization? What is a charitable organization? What’s the difference between the two?

As noted above, nonprofits usually achieve their tax-exempt status under section 501(c)(3). This is what the IRS says about exemption requirements for organizations hoping to qualify for that status under this section: 

“Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.”

Those organizations are organized and operated for specific exempt purposes. Here’s a more in-depth look at those purposes: 

“The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” 

Some nonprofits can be considered charitable organizations because “charitable” is one of the exempt purposes described in section 501(c)(3). The IRS uses the word “charitable” in its “generally accepted legal sense.” 

This includes: 

“…relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

According to the IRS, all organizations that qualify for exemption under section 501(c)(3) are either public charities or private foundations. Because some nonprofits are private foundations, not all nonprofit organizations covered under this section can be accurately described as charities. 

An easy way to think about it is that most charities are nonprofits but not all nonprofits are charities.  

This blog post from Indeed goes into more detail about the difference between the classifications. You can find more tax exemption information for charitable organizations here

Finally, it’s also important to keep in mind that some charities will receive their tax-exempt status under other sections, like section 501(c)(4) or section 501(c)(7). You can learn more about that below.

Key Differences of Not For Profits vs Nonprofits

Tax-Exempt Status

The IRS grants an organization tax-exempt status if it meets certain requirements laid out in section 501 of the IRC. 

As noted above, although the organizations are similar, nonprofits, charities, and not-for-profits don’t automatically receive the same tax-exempt status or fall under one specific section. The status is determined by many factors, including the purposes for which the organization was created and the way the organization operates. 

The organizations that most people consider to be nonprofits usually receive their tax-exempt status under section 501(c)(3) of the IRC. Some but not all charitable organizations receive their tax-exempt status under that section. Not-for-profit organizations usually receive their tax-exempt status under sections other than 501(c)(3). 

The section under which an organization qualifies for exemption matters for a number of reasons. One of the most important reasons is that having tax-exempt status doesn’t guarantee that donations to that organization will be tax deductible. 

For example, donations made to organizations that qualify for tax exemption under section 501(c)(3) are tax-deductible contributions. Those organizations usually have to disclose donor information. Organizations that qualify under section 501(c)(4) don’t usually have to disclose donor information, as those donations are not considered tax deductible.  

If you’re looking for more information on an organization’s tax-exempt status, you can find The Tax Exempt Organization Search Tool here. Learn more about charitable contributions here.

Legal Entity

Nonprofits, charities, and not-for-profit organizations are all legal entities. The fact that these organizations are legal entities does not automatically inform their tax-exempt status as that is something the IRS has to approve.  

According to Classy, a nonprofit can exist “as a separate legal and business entity from the business owner,” while the members of not-for-profit organizations “cannot separate themselves legally from the organization.” 

Or, as Donorbox puts it, the key difference here is that nonprofits can have a separate legal entity “through which to conduct business,” while not-for-profit organizations cannot have one.

Public Benefit

As mentioned above, nonprofit organizations have to operate for public benefit or public good while not-for-profit organizations do not have to be organized or operated for that purpose. 

Not-for-profit organizations are, however, usually required to operate primarily to promote social welfare to benefit the community. 

According to the IRS:

“To be operated exclusively to promote social welfare, an organization must operate primarily to further the common good and general welfare of the community’s people (such as by bringing about civic betterment and social improvements).”

Organizations that do not operate to promote social welfare may qualify for exemption under another section of the code. 

Types of Organizations

Nonprofits or charitable organizations usually receive their tax-exempt status under section 501(c)(3). Examples of nonprofit organizations include Feeding America, Best Friends Animal Society, and Doctors Without Borders. Charitable organizations include churches and educational organizations. 

Not-for-profit organizations covered under other sections include civic leagues and social welfare organizations, local associations of employees, and social clubs. 

Income Tax and Property Tax

If an organization applies for and receives tax-exempt status under section 501(c), it is exempt from paying federal income tax. Sometimes, the organization may be exempt from paying other taxes like sales or property tax. This is usually the case for not-for-profit organizations. You can find information on donated property for 501(c)(3) organizations here.

Fundraising Activities

501(c)(3) organizations cannot be what the IRS calls “action organizations.” Additionally, a 501(c)(3) organization “may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.” Those activities include political activities and lobbying activities

Social Clubs and Recreational Clubs

According to the IRS, social clubs must be organized “for pleasure, recreation, and other similar purposes.” These organizations usually qualify for tax-exempt status under section 501(c)(7). 

Examples of tax-exempt social and recreational clubs are “college social/academic fraternities and sororities, country clubs, amateur hunting, fishing, tennis, swimming, and other sports clubs, dinner clubs that provide a meeting place library, and dining room for members, variety clubs, hobby clubs, and homeowners or community associations whose primary function is to own and maintain recreational areas and facilities.” 

Conclusion

Do you want to form your own nonprofit organization? We’d love to help you get started. Our nonprofit and corporate development and creation services include: 

  • Assisting in the creation of new nonprofits
  • Corporate registration
  • IRS 501(c)(3) tax-exempt recognition application and expedited processing
  • Formulation of bylaws
  • Establishment of the board of directors
  • Registration with state agencies
  • State sales/purchasing exemption recognition

If you’re looking to apply for and win a world-changing grant, we’d love to support you. Learn more about the grant proposal writing services we provide at Pearl Solutions. 


chevron-down