Apart from traditional businesses set up with the aim of making profits, there are other types of organizations that are set up with other objectives in mind. There are terms used to describe such organizations as ‘nonprofit’ and ‘not-for-profit’. Both these types of organizations are quite similar to one another since they do not exist with the aim of making a profit. Due to their close similarities, these organizations are often confused to be the same, and the terms nonprofit and not-for-profit are used interchangeably by many. The article offers a comprehensive explanation on both these types of organizations and outlines their close similarities and subtle differences.
What is a Nonprofit Organization?
According to the Internal Revenue Service, a nonprofit is an organization that is set up for purposes besides making profits. This does not necessarily mean that a nonprofit is a charitable organization, and could be any organization that’s sole purpose is something other than profitability. A nonprofit requires income to run their operations, and it must be noted that a nonprofit must reinvest its income in achieving the organization’s objectives. Furthermore, the employees of a nonprofit will receive salaries that are not connected to the income generated by the nonprofit. A nonprofit will receive a charter from a national or state level and will exist as a separate legal entity. A nonprofit is exempt from taxes, as long as they meet the 501(c) (3) requirements which state that the nonprofit should be operated in a manner that is focused on achieving its purposes, which may be charitable or not.
What is a Not-for-profit Organization?
The Internal Revenue Service defines a not-for-profit as an organization engaged in a specific activity such as a hobby and may include clubs, groups, or associations. However, a not-for-profit just as its name suggests does not primarily seek to make a profit. Any income generated by a not-for-profit can be distributed among its members. For example, a club set up for bakers can hold a bake sale for income, and the income generated can be distributed among the members of the club. A not-for-profit does not exist as a separate entity from its members since members are directly involved in all operations and income which is usually distributed among the members. A not-for-profit that meets 501(c) (7) requirements is not under obligation to pay taxes.
Nonprofit vs Not-for-profit
The major similarity between nonprofits and not-for-profits are that they both operate with objectives other than profit making in mind. Another major similarity between the two is that as long as they meet their specific operational requirements and objectives, nonprofits and not-for-profits are excused from making tax payments. Even though the terms nonprofit and not-for-profit are often times used interchangeably, there are quite a number of differences.
Nonprofits exist as separate legal entity and an income made must be reinvested for its causes. On the other hand, a not-for-profit does not exist as a separate entity and any income made is owned by its members.
Summary:
• Apart from traditional businesses set up with the aim of making profits, there are other types of organizations that are set up with other objectives in mind. Such organizations are called ‘nonprofits’ or ‘not-for-profits’.
• A nonprofit is an organization that is set up for purposes besides making profits, such as charity, religious, or other purposes.
• A not-for-profit is an organization engaged in a specific activity such as a hobby and may include clubs, groups, or associations.