Nonprofit vs Not-for-Profit: Differences & Similarities

Key Takeaways

1. Nonprofits and not‑for‑profits operate to serve a cause rather than generate profits for owners.
2. Nonprofits must reinvest all surplus and adhere to strict IRS rules, while not‑for‑profits have more operational flexibility and varied tax benefits.
3. The best structure depends on your mission, funding needs, and the level of regulatory oversight you’re prepared to accept.

The terms “nonprofit” and “not-for-profit” seem identical and are often used interchangeably. However, despite their similarities in name, there are significant differences between the two in terms of governance rules, tax treatments, and missions, and these differences can impact their operations, legal structures, and funding. This article sheds light on the major distinctions and similarities between both organization types.

What Is a Nonprofit Organization?

It is a type of entity that is formed to serve a public or mutual benefit rather than generate profits for its owners or shareholders. These organizations can take various forms, such as social advocacy groups, charitable foundations, educational institutions, and more. The primary goal of a nonprofit is to further a particular social cause.

Nonprofits bring in income through several means, such as donations, grants, the sales of goods and services, and fundraising events. However, any surplus funds generated must be put back into the organization’s mission rather than distributed to shareholders or owners. This reinvestment ensures that the organization continues to pursue its charitable objectives.

What’s more, nonprofits are typically overseen by a board of directors, tasked with managing the activities of the organization’s operations, ensuring that they comply with legal and regulatory requirements, and making strategic decisions to advance the organization’s mission.

What Is a Not-for-Profit Organization?

Also known as a nonprofit organization in some jurisdictions, this organization is similar to a nonprofit in that it is formed to serve public or mutual benefits. However, its major defining lies in how it operates and manages its finances.

Not-for-profit organizations can operate and generate income similar to conventional businesses. They can invest in assets, pay employees, and even earn a profit. The key difference lies in how the generated profit is managed. Unlike for-profit enterprises that distribute profits to shareholders, not-for-profit organizations reinvest any extra funds to further their objectives and missions.

These organizations can engage in a diverse array of activities, ranging from healthcare and social services to arts and culture. Like nonprofits, this type of organization also enjoys a tax-exempt status. However, it is only applicable if they meet the specific criteria set forth by the IRS or the relevant tax authority in their jurisdiction.

The best marketing for small businesses focuses on building strong connections with your audience and delivering value that drives growth. When you understand your customers’ needs, you can properly tailor your products and services, thus, increasing customer satisfaction.

Difference Between Nonprofit and Not-for-Profit

Non-profit vs. not-for-profit: what’s the major difference? Well, the primary distinction lies in how they handle financials and distribute profit:

• profit distribution: Nonprofits are strictly prohibited from distributing any profits to members, owners, or shareholders. On the other hand, not-for-profits can earn a profit but must pump it back into the organization to forward its mission;
• operational approach: Nonprofits often rely heavily on grants, donations, and fundraising to support their activities. In contrast, not-for-profits are free to engage in revenue-generating activities and operate more like a traditional business;
• regulatory oversight: While both types of organizations are subject to regulatory oversight, the specific requirements and compliance standards may vary;
• public perception: Nonprofits are generally perceived as entities solely focused on benevolence activities or religious activities, while not-for-profits may be involved in a broader range of activities, including trade associations, social clubs, and cooperatives that benefit the community.

As mentioned above, tax-exempt status is another major difference between the two types of organizations. Not-for-profits enjoy exemption from taxes primarily because they do not distribute profits to individuals and are not bound by the same strict criteria as nonprofits. To be eligible for tax exemption, nonprofits have to follow the criteria in the IRS code, specifically in Section 501(c)(3). This code includes requirements such as:

• not engaging in politics or lobbying efforts;
• ensuring that no part of the organization’s activities involves the influence of legislation;
• operating only for educational, scientific, religious, or literary purposes;
• limiting the organization’s earnings to ensure it benefits the public rather than shareholders.

Only after meeting these criteria will a nonprofit gain exemption from tax.

Similarities Between Nonprofit and Not-for-Profit

Despite their disparities, not-for-profit and nonprofit entities have several things in common. Both organization types aim to fulfill a specific aim or purpose rather than generate profits for their owners. While they can engage in activities to make a profit, they are required to reinvest any surplus funds into the organization to fund its operations and missions.

Not-for-profit and nonprofit entities are usually overseen by trustees or a board of directors tasked with overseeing the smooth running of the organization, as well as ensuring it complies with legal and regulatory requirements.

What’s more, both organization types are required to ensure financial records are kept error-free. Many of them choose to publish annual reports or financial statements as they provide stakeholders with insights into their operational activities and financial health.

Not-for-Profit vs. Nonprofit vs. For-Profit Organizations

While both organization types share similarities, they are fundamentally different from for-profit organizations. For-profit entities are primarily established to generate profits for their shareholders or owners. Unlike not-for-profits and nonprofits, for-profit organizations are not eligible for exemption from tax and are subject to various regulatory requirements and tax obligations.

For-profit organizations have the flexibility or discretion to distribute profits to their shareholders, the same as they have the liberty to engage in a wide range of profit-generating activities without restrictions. However, they are subject to higher tax rates and fewer tax benefits compared to not-for-profit and nonprofit organizations.

Securing a business name is one of the basic ways to establish a strong brand identity and set yourself apart from competitors in the market. It also helps to protect your brand from unauthorized use and infringement legally. Read this comprehensive guide from business gurus to learn how to secure a business name in 2025.

Final Thoughts: Which Is Right for Your Business?

Not-for-profit and nonprofit organizations both aim to serve the community and advance specific causes without taking profit-making as their primary goal. However, deciding which one is right for your business depends on factors such as your financial goals, company mission, and operational approach.

If you are looking to operate within the educational, charitable, scientific, or religious sphere and aim to benefit from tax exemption and potential fundraising opportunities, a nonprofit structure may be the best fit for your organization. On the other hand, if you seek more operational flexibility and don’t require the stringent tax exemption status provided to nonprofits, a not-for-profit structure could be more suitable.

So, nonprofit versus not-for-profit organizations: which is ideal for your business? Well, your choice should align with the goals and objectives you have planned out for your organization, as well as whether you can achieve the objectives while remaining financially sustainable. Be sure to understand the distinctions between both organization types so you can make an informed decision that will best serve your mission and the community you aim to support.