Nonprofit vs. Not-For-Profit: Understanding the Key Differences

Sarah Ellis -

Starting a mission-driven organization is an exciting journey, but it comes with challenges. You know that you want to make a difference, but you might have some questions about how to structure your organization. Is not-for-profit the same as nonprofit? Which one is right for you? Let’s dive deeper into the discussion of nonprofit vs. not-for-profit to help you make an informed decision.

What Is a Nonprofit Organization?

Nonprofit organizations are dedicated to serving the public good. They focus on specific causes or issues and reinvest any earnings back into their mission. Nonprofits can range from small local charities to large international foundations.

The pros of a nonprofit structure include:

  • Tax-exempt status, which can save your organization a lot of money
  • Ability to accept tax-deductible donations, attracting more donors
  • Access to grants from government agencies and private foundations
  • Limited liability protection for board members and officers
  • Potential for greater public trust due to transparency requirements

Nonprofits are the most common type of mission-driven organization, but they do have some disadvantages to consider:

  • Strict regulations and reporting requirements
  • Limitations on political activities and lobbying
  • Restrictions on how funds can be used
  • Competitive landscape for grants and donations

What Is a Not-for-Profit Organization?

Not-for-profit organizations serve a specific group or community. Like a nonprofit, they reinvest any earnings back into the organization’s goals. Unlike a nonprofit, they don’t have to benefit the public good, and can include social clubs, trade associations, or community groups.

The pros of a not-for-profit structure include:

  • More flexibility in operations and decision-making
  • Fewer regulations and filing requirements compared to nonprofits
  • Ability to focus on serving a specific group or interest
  • Often easier to set up and maintain than nonprofits
  • Can still qualify for tax-exempt status in some cases

Not-for-profit structures work well for certain organizations, but there are some disadvantages:

  • Limited access to grants and funding opportunities
  • Donations are usually not tax-deductible for donors 
  • Less public recognition compared to nonprofits
  • Potential for personal liability if not incorporated
  • Must still submit payroll taxes and employees must report income

How Are Nonprofit and Not-For-Profit Organizations Similar?

It’s not all about differences in nonprofit vs. not-for-profit structures – they also have similarities. Both share a commitment to social good over financial benefit, reinvesting their profits back into the organization rather than distributing them to shareholders or individuals. Both also typically have a board of directors or another type of committee to guide their mission and strategy. 

Importantly, they both rely heavily on volunteer support, from day-to-day operations to leadership roles. These organizations also face similar challenges, such as limited resources and the need to balance mission-driven work with financial sustainability. Both must navigate the complexities of fundraising and donor relations. And, both usually have some sort of financial reporting requirements, although nonprofits may have more.

What Is the Difference Between Nonprofit and Not-for-Profit?

When deciding between a nonprofit and not-for-profit, differences are key. Let’s break down these distinctions to help you choose the right structure for your mission.

Purpose and Objectives

Nonprofits aim to benefit the public or a broad section of society. They often tackle large-scale issues like poverty, disease, or environmental protection. Nonprofits might run food banks, offer educational programs, or conduct medical research.

Not-for-profits, in contrast, serve a specific group or an association’s members. This could be a neighborhood association, an amateur sports league, or a professional networking group. Their activities are focused on benefiting their defined community rather than the general public.

Funding and Revenue

Nonprofits rely on a mix of funding sources. They may receive grants from government agencies or private foundations. Individual donations are often a key part of their funding strategy. Many nonprofits also earn revenue through services, events, or product sales related to their mission.

Not-for-profits typically have a different funding model. Many not-for-profits charge membership fees. Some sell products or services directly related to their purpose. Not-for-profits can also accept donations, but they’re usually not tax-deductible for the donor.

Organizational Structure

Nonprofits usually have a more formal structure. They have a board of directors responsible for governance and strategic direction. Many employ paid staff to run day-to-day operations, though nonprofit volunteers also play an important role.

Not-for-profits can be more flexible in their structure. Some are run entirely by volunteers, while others may have a small paid staff. They often have a board or committee, but it may be less formal than in a nonprofit.

Nonprofits are typically incorporated as separate legal entities, a process that involves filing articles of incorporation with the state. Incorporation provides protection for individual members from personal liability for the organization’s debts or legal issues.

Not-for-profits can choose to incorporate or remain unincorporated. Smaller groups might stay unincorporated to avoid paperwork and fees. However, this means members or leaders could be held personally liable if the group runs into legal issues.

Tax Benefits and Regulations

Nonprofits have received approval for 501(c)(3) status with the Internal Revenue Service (IRS), which offers federal tax exemption and allows donors to deduct contributions. With this tax-exempt status, nonprofits must follow strict rules about political activities, financial reporting, and use of funds.

While not-for-profits can qualify for 501(c)(3) status if they meet certain requirements, they’re typically classified under 501(c)(7) for recreational organizations. That means that while they may still get certain tax benefits, donations to them are not tax-deductible for donors. It also means they face fewer regulations than nonprofits, so they have more flexibility in their activities. 

Nonprofit vs. Not-for-Profit Organization: Choosing the Right Structure

So, should you structure your organization as a nonprofit or not-for-profit? To determine the best structure, first think about whether you’ll serve the general public or a specific group of members. Consider the importance of liability protection for your activities and whether you’re comfortable with regulations and reporting requirements. Research nonprofit vs. not-for-profit examples in your state for more guidance.

If you will serve the public, rely on grants and donations, need liability protection, and can handle strict regulations, a nonprofit structure may be best. If you’re serving a specific group, prefer operational flexibility, and don’t need extensive tax benefits, you might want to choose a not-for-profit structure.

Not-for-Profit vs. Nonprofit Fundraising: Donately Does It All

So, is there a difference between nonprofit and not-for-profit? Not when it comes to your fundraising website. Whether you choose a nonprofit or not-for-profit, Donately can help you set up online fundraisers, expand your reach, engage donors and make a positive change in people’s lives.  

With features like customizable donation pages, donor management tools and analytics, Donately is designed to help both nonprofits and not-for-profits maximize the impact of their online fundraisers. Sign up for free today.