There are countless organizations and charities that work to help individuals or communities in need. These types of organizations are typically considered not-for-profits. Read on to find out what is a not-for-profit organization and how not-for-profits differ from nonprofit organizations.
What is a not-for-profit organization?
A not-for-profit organization does not earn any profits for its owners. Instead, the organization donates the money it receives to help fund the organization’s objectives and goals. A not-for-profit might also use received donations to stay up and running.
In many cases, not-for-profits are tax-exempt, meaning they are not required to pay most taxes. However, businesses are not automatically exempt.
To achieve tax-exempt status, you must apply for it through the IRS. Qualifying not-for-profit organizations can apply for 501(c)(3) status to become exempt from federal income tax.
For-profit vs. not-for-profit
The main difference between for-profits and not-for-profits is how the organization handles its profits. A for-profit organization or business distributes profits to owners.
Although they may differ when it comes to handling profits, for-profits and not-for-profits do have some similarities. Typically, not-for-profits use the same business strategies and techniques as for-profit organizations. Both organizations set goals and want to reach them.
A for-profit business can participate in a wide range of activities. On the other hand, not-for-profit organizations must exclusively operate as a charity or for scientific, religious, or public safety purposes.
Want to impress your friends at a dinner party?
Get the latest accounting news delivered straight to your inbox.Subscribe to Email List
Not-for-profits vs. nonprofits
Many people mistake not-for-profits and nonprofits to be the same thing. However, they are not. Take a look at the differences between nonprofit and not-for-profit services below.
Not-for-profit: Supports a cause, activity, or the community
Nonprofit: Supports charitable, educational, or religious purposes
Uses of profits
Not-for-profit: Funds activities, hobbies, and recreation related to their cause or goal
Nonprofit: Profits are used to support the organization’s cause or goal, but funds can also be used to pay for employee salaries and administrative need
Type of employees
Not-for-profit: Volunteers, paid staff, or a mixture of both
Nonprofit: Could have paid staff as well as paid volunteers
Not-for-profit: Yes (must be both state and federal levels)
Nonprofit: Yes (must be both state and federal levels)
Stock option availability
Types of not-for-profits
There are a couple of different types of not-for-profits. Some examples of not-for-profit organizations include:
- Social organizations
- Community organizations
Social organizations strive to improve or cater to social causes. These organizations may assist the homeless, provide free legal services, or help veterans find work.
A social organization’s earnings typically come from donations or profits made from selling goods. Social organizations might use any profits to provide services to those in need or to fund the organization’s goals and operations (e.g., supplies).
Most not-for-profit organizations are considered community organizations. They could range from small local groups to larger agencies with branches across the country.
Individuals establish community organizations to help with causes around the community. Some causes that community organizations might help with include cleaning up the community, improving neighborhoods, and promoting recycling locally.
Who can start a not-for-profit?
Anyone can start a not-for-profit. Most individuals start not-for-profits because they see a need in their community or the world (e.g., homelessness). Keep in mind that not-for-profits must be for causes relating to scientific, religious, or public safety purposes.
If you want to start a not-for-profit, you need to research the problem at hand. And, like other entrepreneurs, you must create a business plan. When establishing your business plan, outline the problem, your objectives, and how you plan to reach your goals.
If you’re a little perplexed about not-for-profits, don’t worry. Check out a summary of the key points about not-for-profits below.
- Owners make little to no profits
- Can be tax-exempt
- Is established to help with a cause or the community
- Has volunteers or paid staff (or both)
- Can be started by almost any individual who has a legitimate charity or cause
Regardless of whether you run a not-for-profit, for-profit, or small business, you need an easy way to track how your organization is spending money. Patriot’s accounting software lets you streamline your accounting process so you can get back to business. Start your self-guided demo today!
This article has been updated from its original publication date of July 29, 2015.This is not intended as legal advice; for more information, please click here.