Non-Profit vs. Not-for-Profit: Key Considerations and How to Choose the Best Organization Type

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:

  • Form 990 Series informational returns, which include the organization’s annual financial statements.
  • Employment tax forms report employment taxes for organizations with employees.
  • Unrelated business income tax forms report revenue from activities unrelated to the non-profit purpose. 

    • 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:

  • American Heart Association
  • American Red Cross
  • ASPCA
  • Goodwill Industries
  • Habitat for Humanity
  • United Way

    • 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: 

  • American Federation of Teachers
  • American Legion
  • Greater Rochester Chamber of Commerce
  • Jules Weber Foundation
  • Laborers' International Union of North America
  • Noyac Golf Club

    • 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: 

  • Use of profits: Both non-profit and not-for-profit organizations must not distribute profits to owners, members, or directors.
  • Public scrutiny: Both organizations face potential financial scrutiny and should ensure spending aligns with their stated purpose.
  • Eligibility for private and public funding: Non-profit and not-for-profit organizations can apply for grants and private funding.
  • Stringent compliance requirements: Tax-exempt organizations must file annual informational returns and comply with compliance requirements. 

    • Key Differences 

    What are the differences between non-profits and not-for-profits? The following characteristics differ between non-profit vs. not-for-profit: 

  • Organizational goals: While non-profit organizations must support the public benefit, not-for-profit organizations may exist to further their owners’ interests.
  • Deductibility of charitable contributions: Donations to non-profit organizations are generally tax-deductible for the donor, but not all contributions to not-for-profit organizations qualify for deductibility.
  • Tax-exempt status: 501(c)(3) tax-exempt status applies to specific activities, and many not-for-profit organizations cannot qualify for the same tax advantages that non-profits can obtain. 

    • 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: 

  • Organizational purpose: Non-profit organizations must benefit the public, while not-for-profit organizations can align with owners’ interests.
  • Fundraising needs: Non-profit organizations can solicit donations by providing tax deductions for donors. In contrast, not-for-profit organizations might not secure large private donations.
  • Compliance requirements: Non-profit organizations typically follow stricter reporting requirements than not-for-profits, depending on their tax-exempt status. 

    • 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.