If you’re unfamiliar with the terms “nonprofit” and “not-for-profit,” they may sound like the same thing—and many people use them interchangeably, too. But add “for-profit” into the mix, and things can get even more confusing.
Despite their similar names, these three organizations operate differently, working with various goals. They also have unique tax rules, governance structures, and purposes. This article will explore what each one means so you can figure out which structure best fits your business or cause.
Table of Contents
What is a nonprofit organization?
What is a not-for-profit organization?
What is a for-profit business?
Nonprofit vs. not-for-profit vs. for-profit businesses: What are the differences?
1. Purpose and mission
2. Liability
3. Tax treatment
4. Revenues
5. Employees
How to switch organizational types
Converting from nonprofit or not-for-profit to for-profit
Converting from for-profit to nonprofit
Final words
What is a nonprofit organization?
A nonprofit organization has one goal: to support a social cause or serve the public good, like education, charity, animal welfare, or research. Unlike businesses that aim to make money for owners or investors, nonprofits reinvest all their earnings into their mission to further their work.
Running a nonprofit comes with tax benefits, like exemptions from income tax, property tax, and sometimes even sales tax. However, in return, you’ll have to be transparent about how you use your funds.
Nonprofits can take many forms, including colleges, research institutions, charities, and places of worship. While they handle finances like businesses (e.g., raising money and managing budgets), their main goal is to benefit the public, not to generate profits for owners or shareholders.
What is a not-for-profit organization?
A “not-for-profit” group also doesn’t exist to make money for its owners. Like nonprofits, everything they make funnels back into the organization to support and sustain its operations. However, what makes them different is the not-for-profits don’t have to support any social causes or benefit the public.
These organizations usually support a specific cause or serve their members’ interests. For example, a recreational sports club can be a not-for-profit organization. Not-for-profit organizations must also apply for tax-exempt status with the IRS. Nevertheless, donations to not-for-profits aren’t tax-deductible.
What is a for-profit business?
A for-profit business’s primary goal is to make money. Whether selling products, offering services, or creating solutions people need, the profit it earns funds the company and goes to owners, shareholders, or investors as a return on their investment and efforts.
Most e-commerce businesses fall into this category. Running an online store, selling wholesale, or using online marketplaces are all examples of for-profit organizations. Since individuals or shareholders benefit from this organization’s profits, they will pay taxes on their earnings. However, owners can take profits as personal income or reinvest them to help the business grow.
Nonprofit vs. not-for-profit vs. for-profit businesses: What are the differences?
1. Purpose and mission
The biggest differences between these three organizations are their purpose and mission. Nonprofits focus on supporting a social cause, meaning their mission is to serve the public good. Thus, any money they make will help support their mission instead of going to the owners’ or shareholders’ pockets.
On the other hand, for-profit businesses exist to make money for their owners and shareholders. Although their services may help a community, their main objective is to profit.
Not-for-profit organizations sit somewhere in between. They don’t have to focus on a social cause and can serve personal interests. However, the profits don’t go into anyone’s pockets either—everything goes back into the organization as a reinvestment.
Regardless, all three organizations share one common goal: offering value. Whether they provide a service, serve a community, or create products, each one won’t exist without adding something valuable to enough people’s lives.
2. Liability
Nonprofit organizations can function like traditional C corporations, meaning they are separate legal entities from their founders. In contrast, not-for-profit organizations are more like general partnerships, with no legal separation between them and their members.
However, some states (like New York and Florida) allow not-for-profits to exist as separate legal entities while still qualifying for some state tax exemptions. Similarly, owners and shareholders of for-profit businesses often enjoy protection from personal liability through legal structures like LLCs or corporations.
Hence, if the business takes on debt or faces legal trouble, the company is responsible, not the individual owners. However, there are exceptions, such as when an owner personally guarantees a loan or does some illegal activities.
3. Tax treatment
Nonprofits are tax-exempt, meaning they don’t have to pay federal income taxes on money earned for their charitable mission. Depending on the state, they may also not pay federal, state (income), property, or sales taxes.
Although not-for-profits don’t distribute profits to owners, they aren’t always tax-exempt. Usually, it depends on their structure and activities—so there’s a good chance the government will still require them to pay income taxes.
In contrast, for-profit businesses don’t have that luxury. They must pay taxes on their earnings, including federal, state, property, and sales taxes. The exact amount depends on the business type and location.
4. Revenues
Nonprofit organizations focus on raising as much money as possible to support their cause. In contrast, not-for-profits don’t focus on revenue goals—though anything they make must go back into the organization. On the other hand, for-profit businesses do everything they can to generate revenue to distribute to owners/shareholders or reinvest for growth (or both).
5. Employees
Nonprofits often have paid staff, including leadership roles like a president or CEO. In contrast, volunteers typically run not-for-profit organizations. However, since nonprofits prioritize funding their mission, salaries are often lower than those in for-profit businesses.
For-profit businesses hire employees to generate profit for owners and shareholders. They offer many benefits to attract and keep top talent, including higher salaries, stock options, and bonuses.
How to switch organizational types
Starting as a nonprofit or not-for-profit business doesn’t mean you’re stuck there. You can always change your organizational structure, although the process is difficult. Here’s how you switch from one organization to another.
Converting from nonprofit or not-for-profit to for-profit
Before you convert from a nonprofit or not-for-profit to a for-profit business, you must send a statement of nonprofit conversion in writing to the IRS. Here’s what to include in your statement:
- Why you’re converting
- A certified copy of your liquidation plan outlining what will happen to the nonprofit’s assets during the transition. Be sure to include any assets that will transfer to the new for-profit business in the fair market value.
- A list of who will receive the assets and what assets you will distribute.
- An estimate of the organization’s fair market value.
Converting from for-profit to nonprofit
Turning a for-profit business into a nonprofit is not as straightforward. The IRS has strict rules to prevent businesses from converting to avoid taxes. However, you can complete the process by following these steps:
- Craft a mission statement showing how your nonprofit organization will serve society, including charitable purposes.
- Create and approve bylaws through a vote by the appointed board of directors. You can modify your existing corporate bylaws to align with your new nonprofit mission or draft new ones. Additionally, you can keep some of your current board members or appoint a new team.
- Submit your articles of incorporation to the state’s Secretary of State office.
- Follow your state’s specific conversion rules. For example, in New York, you must first establish a separate nonprofit organization and merge it with your for-profit business to create a new entity.
Final words
Deciding between a nonprofit, for-profit, or not-for-profit organization comes down to your goals, values, and what you hope to accomplish. The good news is that you can start any of these with little to no upfront money.
If you want to impact lives through charity, education, or other social causes, go for a nonprofit organization. But a not-for-profit will offer a better structure if you want something that benefits only certain people or a community without many restrictions. Finally, if your goal is making a profit, for-profit is the one for you.
