Not for Profit vs Non Profit: What's the difference?

Categories: General
Updated: April 01, 2021

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Not for Profit vs Non Profit: What's the difference?

It is commonly misunderstood that not for profit vs nonprofit organization are the same since the label of these types of business have clearly claimed that they might not focus on revenue or profit. However, it is not that simple and also not right to assume so.

Non profit and not for profit organizations are also believed not to make money from their corporate operations. There is a myth that these companies make the only distinction in the manner these profits are used, creating profits like any for-profit company. The object of their life is the basic feature that differentiates these organizations.

They do not only work to gain profits, but their priority is to represent humanity first.

This article will point out not for profit vs nonprofit: what’s the difference between them. In order to help people who have just started a new business to know better of the structures and related terms.

Table of contents

What is a Not for Profit organization?

not for profit organizations invests revenue back into their organization and projects
Not for profit organizations invests revenue back into their organization and projects

A non profit corporation is one that does not transfer revenues to its investors and customers but instead invests it back into their organization and projects. In order to support those in need, anybody who sees a need should create a not-for-profit business.

Clubs such as sports clubs, which frequently hold charitable activities to raise funds for a single cause, may include non profit groups. And if the proceeds are then donated to a nonprofit organization, these fundraising activities are also deemed “not-for-profit.”

Under section 501(a) of the Internal Revenue Code, certain non profit entities are granted tax-exempt status; additionally, the corporation must seek 501(c)(3) status from the IRS to achieve this. These firms also do not have to pay taxes on land or sales.

A non profit corporation reinvests all the funds it has gained, collected, or obtained back into the service of the firm and further its aims through donations.

There are several types of the not for profit organizations. You should take a look, and you will be able to understand the structure of this kind of organization, and later on, you will see the differences between not for profit vs nonprofit company.

1. Organizations for civic advocacy

Social advocacy organizations are founded to support or lobby a particular social cause or political effort. To educate the public of the cause, they advocate and inspire the public to support their cause; they will coordinate fundraisers and other activities.

Such groups raise funds from members of the public and private organizations that support their cause through membership fees and contributions. They are listed for tax purposes under 501(c)(4) of the US Internal Revenue Service.

2. Organizations of Trade

Trade unions are founded to enhance their members’ market conditions. Via membership fees, certain groups earn donations, and charging members who participate in their education services a fee. Chambers of commerce, real estate commissions, and associations for health workers are some different forms of trade organizations.

3. Foundations

Rich individuals or corporations commonly set up foundations to finance non profits and activities that advance a particular social cause. To maintain their rank, they are expected to donate a specific part of their revenue. In the United States, even if they can contribute to groups engaged in government advocacy, foundations are prohibited from funding political operations.

Foundations are divided into either public or private foundations. A person, family, or organization creates a private foundation. To satisfy a payout obligation, the foundations are required, and they must report all grants paid out every year.

On the other hand, public foundations are private organizations that raise funds from multiple sources, such as persons, corporations, or other foundations. They assist in direct programs of any kind, such as homeless shelters, and they use the funds requested to finance their operations.

What is a Nonprofit organization?

Nonprofit organization
Nonprofit organization

A “nonprofit” is an organization that does not function for the intent of personal benefit. Nonprofit agencies are also referred to as non-governmental bodies. As organizations that operate for some sort of charitable purpose, they can be described in simple terms. This goal may include (but is not limited to the advancement of trade, literature, technology, or other fields. Restricted liability for non profit organizations registered under section 8 of the Indian Corporations Act is given tax exemption by the Internal Revenue Service (IRS).

Jobs taxes are usually the same for all non profit and non profit entities, in addition to federal and state laws affecting the workplace.

In order to be listed as a nonprofit, instead of prioritizing dividends, the corporation must strive to fulfill the company’s group aims and its charitable objectives.

There are more than 1.6 million non profit organisations in the United States. Nonprofits represent the general interest and are often listed as tax-exempt by the IRS. There are 27 distinct types of non profit organisations, to compare not for profit vs non profit, this number may give the clear answer that the nonprofit company might involve more processes. Every classification has its own set of rules for the following:

  • Elegibility
  • Lobbying
  • Vote operations
  • Tax free donations

IRS 557 includes information about the various types of non profit organizations.

Public charities, trusts, civic advocacy organizations and trade unions are different forms of nonprofit organizations. Any revenues generated by these organizations shall not be paid to members or owners. In comparison, nonprofits do not issue stocks.

Social Advocacy Group

Social Advocacy groups are listed as 501(c) (4). Public justice organizations lobby or encourage a form of social or political initiative. Funds typically come from grants or subscription fees. Examples of civic justice organizations include Greenpeace, NAACP, ACLU, and the National Women’s Organisation. They are now involved in fundraising, lobbying, and attempts to educate the general public about their cause.

501(c) (a) (1)

501(c)(1) are nonprofit entities organized under the Congress Act, such as the federal credit unions. Because these entities are founded by Congress, there is no application and they do not have to file a tax return. Contributions shall be allowed where they are made for public purposes.

501(c) (a) (2)

501(c)(2) nonprofit organisations shall be formed to retain titles to exempt entities. Involved parties must apply with IRS Form 1024 for this status. They are expected to pay taxes yearly with forms 990 or 990EZ.

501(c)(3)-Organizations in Charity

Many nonprofit entities come under 501(c) (3). These include religious, cultural, charitable, science and literary organisations. Donations of 501(c)(3) organizations are tax-deductible.

The biggest form of public charity is 501(c)(3), with about 1 million registered in the United States. Examples include food banks, libraries, art associations, amateur athletics, universities, low-income housing agencies, and animal care organizations. Charities are generally financed by gifts, federal grants, or membership fees. All profits for classes in 501(c)(3) is excluded from tax.

There are five forms of 501(c)(3) organisations:

  • Private Foundations
  • 509(a)(1)
  • 509(a)(2)
  • 509(a)(3)
  • 509(a)(4)

Foundations

The United States has an estimated 103,430 foundations. Typical missions include fundraising for other nonprofits and sponsoring events and awareness and outreach projects. Many of the foundations concentrate on identifying worthwhile non profit organizations to assist through grants and advice. Foundations are typically set up by rich people or corporations.

To remain listed as a foundation, a certain part of the profits must be contributed on an annual basis. This is to avoid abuse of a base for personal benefit or tax evasion. Foundations are often excluded from any form of political activity, although they can help groups that participate in political lobbying. The Bill and Melinda Gates Foundation and the Ford Foundation are two examples of well-known foundations.

501(c)(4) - Civic League, Social Welfare Organization or Local Employee Association

Civic leagues, social welfare groups, and state staff unions fall under the 501(c)(4) grouping. They have fewer limitations when it comes to advocacy operations, such as lobbying. These organizations aim to help people within the association who may have endured hard times and the general well-being of the community members. Nonprofits can apply for this designation with Form 1024 and file annual returns with Form 990 or Form 990EZ.

501(c)(a)(5)

Labor, farming, and horticultural associations fall under the framework of this classification. They are responsible for schooling, changing working standards, and increasing productivity and quality. These organizations are entitled to participate in lobbying. 501(c)(5) charities are financed by grants and membership fees.

501(c)(6) - Trade or Professional Association

Examples of 501(c)(6) groups include industry leagues, chambers of commerce, and real estate commissions. Its goal is to improve the business conditions of its members. Nonprofits eligible for this designation must request Form 1024 to the IRS.

501(c)(6) Entities can participate in political activities. Typically, they are subsidized by member fees and provide programs and facilities for member education. There are nearly 63,000 501(c)(6) groups in the United States. Examples of well-known 501(c)(6) groups include the American Farm Bureau, the National Writers Union, and the International Association of Meeting Planners.

501(c)(7) - Social or Recreational Club

501(c)(7) Associations are social or sporting clubs. The aim of these nonprofit organizations is to coordinate events that contribute to fun, leisure and socialization. Popular examples include hobbies, country clubs and sports leagues. IRS Form 1024 must be filed to apply for this designation. Tax returns are filed with Form 990 or Form 990EZ.

501(c)(8)-The Fraternal Community

501(c)(8) nonprofit corporations are fraternal societies. They are designed to arrange for the payment of life, disease, injury or other benefits to members and to further the growth of their members. They can include service groups, lineage clubs, or secret societies.

In order to apply for the 501(c)(8) classification, fraternal organizations must have parent and subordinate organisations. Besides, it must have a form of insurance for its members. Such well-known examples of 501(c)(8) nonprofit organisations are the Knights of Columbus and the Shriners.

501(c)(9)-The Employee Beneficiary Association

501(c)(9) nonprofit corporations are charitable beneficiary unions with workers. They make payments to members and their dependents in the event of death, injury, or other tragic incidents. Membership is reserved for workers of a similar boss or members of the same union. Organizations may qualify for this designation with Form 1024 and must request Form 990 or Form 990EZ annually.

501(c)(10)-International Fraternal Organizations and Organisations

501(c)(10) nonprofit organizations are fraternal societies and do not provide members with any form of tax. In essence, 501(c)(8) are fraternal organizations that exist to support members, and 501(c)(10) are fraternal organizations that have members to support outside groups without profit to members.

501(c)(11)-Associations with Teacher’s Retirement Fund

501(c)(11) is a non profit agency that maintains the retirement accounts of teachers. Its sources of income include subscription fees, tax collections, and investment income. They are the local associations. Type 1024 must be filed to apply for the 501(c)(11) designation.

501(c)(13)-Companies in cemeteries

501(c)(13) are nonprofit associations founded to offer burial care to its members. These organizations exist only for this purpose. Popular sources of revenue are subscription fees and donations.

501(c)(14)-The Federal Chartered Credit Union and the Joint Reserve Fund

501(c)(14) are State-owned credit unions and collective reserve trusts. These organizations provide financial services to their affiliates and the community, normally at reduced rates. Revenue outlets are corporate operations and government funding. The legislation in each state varies when it comes to the creation of these types of nonprofit organizations.

501(c)(15)-Association of mutual insurance providers

501(c)(15) are joint insurance undertakings. These nonprofits offer insurance to their affiliates at a premium. They are typically established at the local level. Usually, these organizations offer insurance for property loss, burials, and funerals.

501(c)(16)-Cooperative Seed Financing Associations

501(c)(16) nonprofit organisations are set up to fund seed activities. Usually, these associations are set up by a group of farmers to work together to pool money for agricultural operations. Examples of such activities include the procurement of agricultural machinery, seed planting, poultry, shipment, and marketing.

501(c)(17)-Additional unemployment compensation trust

501(c)(17) extends to additional unemployment benefit trusts. They operate to provide assistance and reimbursement to people who are permanently or temporarily unemployed. These nonprofits must be sponsored by the employer or workers. They will have to reimburse recipients in impartially.

501(c)(18)-The Employee Funded Savings Trust

501(c)(18) refers to employee-funded pension trusts formed before 25 June 1959. This are financed solely by the Member’s donations. Payments should only be used for the provision of services to members. Also, objective criteria for all distributions need to be developed.

501(c)(19)-Organizations of Veterans

501(c)(19) is for veterans’ groups. To be declared worthy, 75% or more of the participants must be serving or retired members of the armed forces. The aim of these organizations is to offer benefits to veterans of the United States Armed Forces. Many veteran groups are funded by grants.

501(c)(21)-Black Lung Benefit Trust

501(c)(21) nonprofit entities are trusts formed to fund lawsuits arising out of the Federal Black Lung Benefit Act of 1969. Coal miners who fall ill due to black lung disease are eligible for compensation. These trusts are financed by coal mining owners.

501(c)(22)-Removal Obligation Reimbursement Fund

501(c)(22) non profit organisations are set up to provide funding to satisfy the commitments of workers who exit from multi-employer pension funds. The aim of these organizations is to help workers meet their pension responsibilities. They are subsidized by workers.

501(c)(23)-Organization of Veterans

501(c)(23) is reserved for veterans’ groups founded prior to 1880. They provide clients with insurance and benefits. In order to be considered, at least 75% of the members must be current or retired members of the United States Armed Forces. Support is given by gifts and government grants.

501(c)(26)-State funded agencies provide insurance care to high-risk people

501(c)(26) are nonprofit agencies founded at the state level to offer benefits to high-risk people who would not be eligible to access insurance by other means. Members are usually people with health risks or pre-existing conditions. Funding is given by gifts or government funds. Examples of countries with these high-risk insurance pools include North Carolina, Louisiana, and Indiana.

501(c)(27)-The National Employers’ Compensation Reinsurance Association

501(c)(27) nonprofit organisations are set up to offer insurance for workers’ compensation plans. Organizations who offer employees with benefits are expected to be members of those organizations and to pay fees. Usually, these groups are funded by federal funding and membership fees.

501(d)-Religious and Apostolic Associations

501(d) groups are religious groups who share the shared treasury. Their distinguishing characteristic is the pooling of all members’ profits, and then the collection of this amount’s levy. There are no limits on political participation. Donations are not exempt from tax.

501(e)-Cooperative Hospital Care Associations

501(e) nonprofit entities offer mutual care to two or more hospitals. There are usually welfare programs that aim to help sick people and their families. Much of the money comes from are tax-free contributions. Form 1023 must be filed to qualify as 501 (e).

Not for profit vs Non profit: The similarities

It is essential that we understand how both terms are related to each other before we discuss the difference between not for profit vs non profit:

  • Both forms of organisations represent the interests of the communities.
  • Both types of organisations may make a profit. But they usually get all their profits back into the company.
  • All non profit and non profit organisations identify their roles and goals very clearly and function accordingly. They have made their goods and services available to the public.
  • Organizations also have minimal resources and therefore trust in the effective deployment of these resources.
  • Like any other organization, these companies will also have well-defined managers, committees, and different personnel layers to make the organization operate better.
  • All nonprofit and non profit organisations can have a combination of paying and volunteer staff.
  • None of these companies shall pay dividends to the owners.

Not for profit vs Non profit: The differences

The differences between Not for profit vs Non profit
The differences between Not for profit vs Non profit

There are some key differences between not for profit vs non profit organizations that you should take into consideration.

  • Non profit organizations work for charitable purposes to the benefit of society while Not for profit organizations are small groups founded for a common purpose
  • Earned profits from this achievement are used in managing the excess expenses of benefiting the goal and there is no cash money benefit for the individual. They do not have employees but instead work on a voluntary basis. Similarly, Not for profit does not aim to make profits; however, the good of the program depends on the money gained to pay off the salaries, and the remaining money is put back in the business. There is no company owner.
  • Non profit organizations have to not only justify how they spend the money, but the accounting standards are also far stricter for them. Non Profit organizations do not have to submit the results of their activities to the public and do not have as strict accounting policies.
  • Non profit organizations have a large amount of people working in them, versus a single person managing a Not for profit organization.
  • Non profit organizations can form a separate legal entity and are thus entitled to a tax exemption. However, not for profit organizations cannot form a separate legal entity, and are not entitled to a tax exemption.
  • Charities and fundraisers have the potential to increase revenue in part by generating sales and profits, these revenues cannot be a part of a charity’s or individual’s overall budget.

Along with theses key differences between not for profit vs non profit organizations, there are some basic information you should take a look to understand.

  Non Profit Not for Profit
Definition These are the associations in this field which aim to achieve the charitable objectives. Because the organization is not for profit (it is in existence for a non profit purpose), it does not distribute its profit for its owners but exists to fulfill an organizational objective.
Scope The potential for these types of organizations is very large. These type of organizations are comparatively less in scale.
Legal Entity They can be run as a separate legal entity. As a non profit may only have the status of a sub-division of a separate legal body.
Type of Organizations They support several different organizations or activities such as art, science, charity, religion, education, or research. These organisations involve a women’s club, a sports club or an organisation established by a people’s party.
Scale These organisations are bigger than non profit organizations. Typically, those organisations are fewer than non profit organizations.
Tax-exempt status Non profit entities are entitled to tax-exempt status in the US. They run like a company and strive to make money. This revenues help both to maintain their mission and to run their activities. They do not help any participant Not for profit organizations are not eligible for tax-exempt status in the US. As specified by the authorities, minor sports-based organizations or other special interest do not qualify as any corporate organization and thus cannot qualify under tax-exempt status.
Employee Payment These organisations do not have full-time staff, but volunteers. These companies have full-time workers whose wages are compensated first and the remaining profits are returned to business.
Charter It shall receive the Charters at the State level It is not chartered at national or state level
Accounting Standards Standards are rigorous and they have to demonstrate how they have invested their money. Accounting practices are less strict since they do not always have to disclose sales
Sources of Revenue Donations, fundraising, subscription fees and funds are the outlets for collecting capital. Gains, gains, revenues contribute to the money and are not necessarily donations.

Wrap up

Not for profit vs non profit are similarly used terms but do not say the same thing. Both are organizations that do not make a profit but may raise an income in order to fund their missions. The money generated by non profit and not-for-profit organizations is used differently. Nonprofit organizations return to the agency all additional profits. In order to compensate their members who work for them, not-for-profits use their extra capital. Their membership is another distinction between nonprofit corporations and non profit organizations. Nonprofits have volunteers or personnel who may not earn any funds from the fundraising activities of the group. For their jobs, they may receive a wage that is independent of the money that the organization has sponsored. Not-for-profit affiliates have the potential to benefit from the charitable activities of the company.

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