You’re finally ready to dive into your passion and create an organization for your cause.
Do you dream of supporting an underrepresented group, improving social welfare, or starting a sports club? After you decide on a goal, you should determine whether a non-profit or a not-for-profit organization is best for your mission.
You may wonder: What is the difference between non-profit vs. not-for-profit? This article will compare the two organization types. You’ll learn the key considerations and how to choose the organization type for your cause.
Understanding Non-Profit Organizations
What Is a Non-Profit?
A non-profit organization is a business established for a specific public benefit.
Your non-profit’s purpose could be charitable, religious, or educational. For example, many hospitals, churches, and public universities are non-profit organizations.
Despite its name, a non-profit organization may generate profits.
However, the entity’s earnings must funnel back to the non-profit to support its business activities. Non-profit organizations may not distribute profits to their members, directors, or officers.
The non-profit supports a social cause, so donations and business receipts should benefit the cause.
1-800Accountant can help you determine whether your organization is eligible for non-profit status.
Benefits of Non-Profit Organizations
Tax-Exempt Status
Non-profit organizations enjoy several tax benefits.
Non-profits often qualify for exemption from federal income tax, known as 501(c)(3) status. Non-profit organizations may also gain exemption from state and local taxes such as income, sales, and property tax. (If your non-profit hires employees, your organization is still responsible for payroll taxes.)
Further, donors can take tax deductions for charitable contributions to 501(c)(3) non-profit organizations. The IRS incentivizes donations to social causes by allowing tax benefits for people who support your mission.
To obtain 501(c)(3) status, the organization must form a legal entity separate from its owners. Eligible entity types include corporations, trusts, or associations.
Before applying for tax-exempt status, review the IRS application process and filing requirements.
You can check your organization’s eligibility with the IRS tax-exemption eligibility questions. The IRS also provides links to state websites containing resources for tax-exempt organizations.
We know the terminology can get confusing. Let us support you through your application process.
Eligibility for Public and Private Grants
Many public and private programs set aside annual funding to support charitable causes. Your non-profit can apply for grants to support your organizational purpose.
Many federal agencies award grants to non-profit organizations. Eligible causes include educational access and heritage protection. You can search for available grants and review the eligibility requirements.
Lower Postal Rates
Non-profit organizations may qualify for reduced postage prices from the US Postal Service. Educational, religious, and other organizations can apply for non-profit postage rates.
Limited Liability Protection
As mentioned, non-profits must organize as corporations, trusts, or associations. Each entity type is legally separate from its owners. Non-profit owners gain limited liability protection from potential claims against the organization.
Disadvantages of Non-Profit Organizations
Public Scrutiny
Non-profits must publicize their annual income statements and balance sheets.
Organizations can face scrutiny over amounts spent on salaries or administrative costs. The public could question how the spending directly supports the non-profit’s mission.
Restrictions on Political Activities
Non-profits can maintain social stances but cannot participate in certain political activities.
For example, non-profit organizations cannot publicly support or oppose political candidates. Non-profits must not donate to political parties or campaigns.
Compliance Requirements
Non-profit organizations must comply with IRS annual reporting requirements. State and local authorities may impose additional compliance rules.
The IRS requires the following annual filings:
Review your state and local tax authority websites for additional reporting requirements. We can help you maintain non-profit compliance.
Examples of Non-Profit Organizations
Non-profit organizations may include churches, public schools, hospitals, research organizations, and museums.
You may be familiar with some of the following non-profit organizations:
Understanding Not-for-Profit Organizations
What Is a Not-for-Profit?
A not-for-profit organization is a group that supports a specific mission.
Not-for-profit organizations aren’t required to benefit the public. For example, not-for-profits can include sports clubs, business affiliations, and social organizations.
Like non-profit organizations, not-for-profit organizations must not distribute profits to members, owners, or directors. Earnings must further the not-for-profit’s purpose.
Benefits of Not-for-Profit Organizations
Flexibility in Organizational Goals
Your not-for-profit organization can choose one of many activities to support, including recreation, business, and other community-based interests. The not-for-profit owners can choose a goal that aligns with their interests.
Tax Advantages
Like non-profits, not-for-profit organizations may be eligible for exemption from federal income tax.
Your not-for-profit may not be eligible for 501(c)(3) status, but the IRS provides income tax exemptions for numerous organizations. For example, certain business leagues may qualify for federal income tax exemption under Internal Revenue Code Section 501(c)(7).
We recommend reviewing the list of requirements for tax exemption to understand whether your not-for-profit should apply.
Consult small business professionals who can walk you through the rules.
Access to Grants and Other Funding Sources
Not-for-profit organizations have many of the same funding opportunities as non-profit organizations.
Depending on your not-for-profit’s mission, your organization can apply for public and private grants to help keep the business running. Welfare organizations often qualify for more opportunities than social clubs and sports leagues.
Disadvantages of Not-for-Profit Organizations
Public Scrutiny
Like non-profits, not-for-profits can face public scrutiny over spending decisions. The public could question whether spending supports the not-for-profit’s goals.
Limited Tax Deductibility for Donors
Donors can only take tax deductions for charitable contributions to 501(c)(3) tax-exempt organizations. If your not-for-profit does not qualify for 501(c)(3) status, your donors cannot deduct their contributions to your organization.
For example, local employee associations may qualify for tax-exempt status under 501(c)(4) but could not offer tax deductibility for donors.
You can review the restrictions on tax-exempt organizations to understand the rules that apply to your not-for-profit.
Compliance Requirements
Like non-profit organizations, not-for-profits must file annual financial statements and informational returns.
Tax-exempt organizations should follow the IRS annual reporting requirements or risk losing tax advantages. Your not-for-profit should follow federal, state, and local compliance requirements.
Consult with a tax professional to understand which forms to submit.
Examples of Not-for-Profit Organizations
Not-for-profit organizations may include athletic leagues, business affiliations, and social welfare organizations.
The following not-for-profit examples illustrate a range of organizational purposes:
Non-Profit vs. Not-for-Profit Organizations: Key Similarities and Differences
Key Similarities
Non-profit organizations and not-for-profit organizations share several characteristics.
Similarities between non-profit vs. not-for-profit include the following:
Key Differences
What are the differences between non-profits and not-for-profits? The following characteristics differ between non-profit vs. not-for-profit:
How to Choose: Non-Profit vs. Not-for-Profit
Now you know the key characteristics of non-profits vs. not-for-profits. How do you choose the best organization type?
Consider your goals and imagine your mission’s beneficiaries. For example, think through the following key considerations:
Don’t hesitate to consult entity formation professionals for help with your situation.
Partner with Small Business Experts to Understand Non-Profits
Now you understand the non-profit vs. not-for-profit differences, and you’re one step closer to choosing the best organization to support your cause.
As you navigate the complexities of your decision, consider your goals, beneficiaries, and fundraising needs. Be sure to seek guidance from legal and accounting experts.
1-800Accountant professionals can help you understand the entity formation intricacies. Consult entity formation experts for support in pursuing your mission.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.