Non-profit vs. Not-for-Profit: What’s the Difference?

Non-profit and not-for-profit organizations are two terms for legal entities with different business operations, taxes, and governance. Learn the difference between the two in this guide. 

What is a Non-Profit Organization?

A non-profit organization is a type of company that enjoys tax-exempt status. Any donation that goes to the business is also tax-deductible.

This type of organization can exist for different purposes, primarily for some public benefit. Some include religious, educational, public safety, or research causes. 

To make sure that donations are put to good use, non-profit organizations must be transparent about their operations and financial position. These reports allow them to be exempt from income tax. 

What is a Not-for-Profit Organization?

A not-for-profit organization also does not earn profits. Everything it earns is instantly used to pursue the company’s goals.

These organizations are usually charities or public welfare groups. But they are not required to operate for the public good. Like non-profits, not-for-profit organizations can also apply for tax-exempt status. 

Not-for-profit organizations do not pay sales or property taxes. It can also accept physical items as donations and sell them for charitable purposes. 

However, not-for-profits are required to pay taxes on the payroll of their employees.  

Similarities Between Non-Profit and Not-for-Profit

• Both do not operate to gain profits.
• Both are exempted from taxation by the IRS.

Differences Between Non-Profit and Not-for-Profit

• Non-profits have charitable goals, while not-for-profits may have business goals.
• Non-profits can be separate entities, while not-for-profits do not enjoy legal separation from their members. 
• Donors to nonprofits can deduct their donations on tax returns, while donors to not-for-profits cannot. 
• Non-profits maximize revenues for social causes, while not-for-profits do not aim to earn income.
• Non-profits may have paid employees, while not-for-profits are run by volunteers.

Can I Change From Non-Profit to For-Profit?

You can apply for a change of legal identity by writing a statement of non-profit conversion. This document must include the following:

• The reason for terminating the non-profit organization.
• Fair market value of the organization.
• A list of the recipients’ assets if the assets will be distributed.
• A certified copy of a liquidation plan. 

Many organizations attempt this shift because they want better access to loans and other funding. But there may be additional requirements for you.

Can I Change From For-Profit to Non-Profit?

Yes, but the process is more difficult because the IRS discourages this strategy. There has been a notion that businesses shift from for-profit to non-profit to escape taxes. 

When transitioning, ensure you have a mission statement, establish your bylaws, and incorporate it with your Secretary of State. 

Choose a Suitable Legal Entity

Ultimately, the legal entity you choose depends on your goals as an organization. Do you work to help? Or do you work to earn? 

Conduct a thorough analysis, speak to an expert, and then decide. And if you choose to change your mind as your business grows, there are many ways to change your legal entity in the future.