By DeVry University
March 3, 2023
5 min read
You may have heard the terms “tax exempt,” “nonprofit” or “not-for-profit” used interchangeably to describe organizations that work for the public good. While either term could describe organizations operating under a range of exemptions in the IRS tax code and neither return profits to individual owners or shareholders in the way that for-profit organizations do, they differ in several important ways. In this article, we’ll start by defining nonprofit vs. not-for-profit organizations and explaining the major differences between them.
What is a Nonprofit?
America’s nonprofit organizations serve and strengthen communities in ways that the private sector does not. There are 1.3 million charitable nonprofits in America, with missions as diverse as the populations they work with.
Charitable nonprofit organizations, including churches and religious groups, are considered to be public charities and granted tax-exempt status under Section 501c(3) of the Internal Revenue Service (IRS) tax code and exist to serve the public good rather than generate profits to owners or shareholders.
A nonprofit typically has a specific mission or charity purpose like feeding the hungry, providing disaster relief, sheltering the homeless, conducting medical research or providing health services. Feeding America, United Way Worldwide, Salvation Army and Habitat for Humanity are among the country’s largest and most recognizable charities. Some large healthcare systems, like Ascension and AdventHealth, are nonprofit organizations, as are big charitable foundations the Bill & Melinda Gates Foundation and the Alfred P. Sloan Foundation.
Nonprofits raise money through donations, endowments and grants, and use those funds to support external causes like the ones we’ve just described. To preserve their tax-exempt status, nonprofits must comply with IRS regulations and disclose their finances to the public. Individuals or businesses donating to nonprofit organizations can list those donations as deductions on their tax returns.
Leadership at nonprofit organizations is typically structured with a board of directors who provide governance, oversight and stewardship to advance the organization’s mission. Nonprofit board members are directly involved in fundraising and often required to make annual donations themselves as advocates for the organization. Depending upon the organization’s size and annual operating budget it may have a paid administrative staff that handles everything from fundraising to communications, marketing, managing volunteer recruitment and scheduling, human relations, finance, education and outreach.
What is a Not-for-Profit?
Not-for-profit organizations are similar to nonprofits in many ways. They have missions, but don’t necessarily have to work for the common good. Instead, their goal is to make a profit the same way for-profit businesses do, but all money funnels back into the organization to help keep it running. They may have boards of directors and administrative staffs who work to keep their activities consistent with their missions.
Like nonprofits, they can also apply for and receive tax exemptions under the IRS tax code and be exempt from property taxes and sales tax. Examples of not-for-profit entities include community organizations, sports leagues and social clubs such as college fraternities and sororities, as well as business leagues like chambers of commerce who provide services to dues-paying members.
What Are the Major Differences?
When stacking up nonprofit vs not-for-profit, the two organizations might look pretty much the same to the casual observer. They both conduct fundraising activities. They both recruit volunteers to help with activities and events that advance their missions. They are both tax exempt, in that neither one pays property taxes or sales tax. You’re probably thinking – with all those similarities, why are they considered to be different?
The differences between nonprofits and not-for-profits can be found in their missions, taxation status and financial practices:
- Tax-exempt status: Nonprofit organizations are granted 501c(3) status by the IRS. Not-for-profit organizations, while also governed by section 501c of the tax code, could fall under a different section, such as 501c(7) for recreational organizations. Both types of organizations are considered tax-exempt, but only in the case of the nonprofit are donations to the organization deductible on donors’ personal or corporate tax returns.
- Financial reporting: Nonprofit organizations – even very small ones – must make their finances public, reporting their activities and governance, revenue, expenses and assets so that donors, beneficiaries and the community at large can get an overview of how effectively they are advancing their mission. Not-for-profits are not required to make this disclosure.
- Mission: Nonprofits often focus on social causes like the ones we’ve described above, providing some public benefit. Not-for-profit organizations support business or professional associations (chambers of commerce, for example, are 501c(6) organizations) or social clubs, and exist purely for the benefit of their members. They don’t have to operate for the public good and every penny they raise goes right back into their organization.
The National Council of Nonprofits offers more useful information about charitable nonprofits and what they do, as well as some common misconceptions about nonprofits.
Which Is Right for Your Organization?
If you’re passionate about a cause and want to start up an organization to support it, how do you know whether to set up a nonprofit or a not-for-profit? The answer lies in the purpose of the organization and the goals you’ve established for it. Think about your mission. What will your group do, what communities will benefit from its activities and to what extent will you depend on fundraising to meet your goals?
With a community-focused mission based on social or environmental activities, a nonprofit structure may make the most sense. Structured in this way, you could be granted 501c(3) status by the IRS. You would get the benefits of tax-exempt status and you could find it easier to raise money because donations to your charity would be tax-deductible.
If the venture you have in mind would benefit a smaller community of individuals with a shared interest – a social or recreational club or group of business owners for example – then you wouldn’t be functioning as a public charity and the not-for-profit option would be the most appropriate one. This option would give you the benefits of being exempt from taxes but, unlike with a nonprofit organization, donations to your organization would not be tax-deductible for corporate or individual donors.
Are You Ready to Break Out as a Social Entrepreneur?
At DeVry, we can help you develop many of the skills you’ll need to pursue your goals as a social entrepreneur, launching or leading organizations like nonprofits that thrive outside the boundaries of traditional business. Our Master’s Degree in Public Administration can help you gain leadership and project management skills and learn to manage organizational change. With your choice of emphasis in government or healthcare management, you can prepare to pursue careers in social and community service management, medical or health services management, administrative services management and more. Classes start every 8 weeks.