What Is a Not-for-Profit Business and How Does It Differ From a For-Profit Business?

The terms “nonprofit” and “not-for-profit” are often used interchangeably, but there are some subtle differences between the two. We’ll talk about what a not-for-profit business is, how it differs from the traditional nonprofit, and where the two share some similarities.

Overview: What is a not-for-profit organization?

Unlike a for-profit business, not-for-profit organizations are not created for the sole purpose of making a profit, but are intended instead to benefit a select group of people.

For example, your child’s soccer club would be considered a not-for-profit organization; it was created to benefit club members, with any funds raised to be used for future club activities.

For accounting purposes, there are no major differences between a not-for-profit organization and a nonprofit organization, so any accounting software used for a not-for-profit organization can be used for a nonprofit organization as well.

The difference between not-for-profit and nonprofit

The IRS does not recognize not-for-profits as a separate legal category, but instead classifies organizations based on whether the organization meets specific IRS tax code requirements.

Both nonprofit and not-for-profit businesses can file for an exemption from federal income taxation; charitable organizations are classified as 501(c)(3) organizations, while social welfare organizations are classified as 501(c)(4) organizations.

This tax-exempt status can be particularly important to organization supporters, since contributions to charitable organizations are tax deductible, while contributions given to a 501(c)(4) organization are not.

For example, if you write a check for $100 to the local food bank, the food bank is likely operating as a charitable organization, which means that you can write off the $100 donation as a charitable contribution.

However, if you write a $100 check to your daughter’s soccer club, though classified as a nonprofit by the IRS, it likely falls under the Other Nonprofits category, meaning that, though they are able to accept contributions, those contributions are not tax deductible for the donor.

Nonprofits focus on social issues while not-for-profits focus on more restricted activities. Image source: Author

Another major difference between nonprofits and not-for-profit organizations is that nonprofits usually operate exclusively for charitable, scientific, and educational purposes to benefit the public, while not-for-profit organizations are typically considered social clubs, social welfare organizations, and civic leagues that are created to benefit a select group of people.

Management is another key difference. A nonprofit organization is managed much like a for-profit business, with the intent of earning a profit.

The major difference is that any profit earned does not benefit an individual, owner, or investor, but belongs to the organization. A not-for-profit organization is not created with the intention of earning a profit, but to fund the activities of the organization.

Let’s go back to the soccer club for a minute. The club does not raise money with the end goal of distributing that money back to the public in any form, but instead uses the money to fund activities within the organization.

One final difference is that while nonprofit organizations typically have both paid employees and volunteers, not-for-profit organizations are usually, but not always, run by volunteers.

The difference between not-for-profit vs. for-profit

While not-for-profit and nonprofit organizations have more similarities than differences, there are major gaps between not-for-profit organizations and for-profit businesses.

The main goal of a for-profit business is to earn money. For-profit businesses offer products and services for sale, with any income the business receives from selling those products and services ultimately distributed to the owner(s) or distributed to shareholders and investors.

On the other hand, all money earned by a not-for-profit organization is returned to the organization to be used to benefit a select group of people.

Because of these and other nuances, handling the accounting for a not-for-profit is very different from that of a for-profit business. The best practice is to use fund accounting software, which is designed to handle issues specific to a not-for-profit, such as program funding, donation management, and fund reporting.

Types of not-for-profit organizations

While the terms “not-for-profit” and “nonprofit” can be used interchangeably, nonprofits are usually organizations that are created for the good of the general public, such as the American Cancer Society or even your local food pantry. On the other hand, not-for-profit organizations have a much narrower scope.

1. Youth sports leagues

Most youth sports teams would be considered not-for-profit organizations, as they are established to pay for items such as sports equipment, field upkeep, and travel expenses.

They are not operated for the benefit of the general public, but instead are created to benefit a small subsection of the public. In addition, though parents frequently donate to youth sports clubs, their donations are not tax deductible.

2. Clubs

Maybe you belong to a book club. Or your grandparents belong to a square dancing club. Maybe you’re tracing your ancestors through the Polish-American club or you want to join the local historical society to learn more about the place you call home.

Whatever clubs you belong to, it’s likely that they are operated as not-for-profit organizations, putting membership dues and any other fees you pay directly back into providing the members of the club with benefits available only to them.

3. Theater and arts organizations

Whether your interest is in bellowing Broadway tunes to an enthusiastic audience or learning more about Renaissance art, chances are that the organization offering these choices is a not-for-profit organization.

Not-for-profit? Nonprofit? Which one should you use?

The IRS does not differentiate between not-for-profit and nonprofit organizations, focusing instead on each organization’s eligibility for tax-exempt status, since both not-for-profit and nonprofit organizations work to benefit others.

The major difference lies in who the organization is designed to benefit. If your nonprofit raises funds for cancer prevention, it’s likely a nonprofit, while your son’s travel baseball team is likely a not-for-profit.

For more information on starting a nonprofit, visit the National Council of Nonprofits.