Nonprofit vs. not-for-profit: Key differences explained

Although used interchangeably, the terms nonprofit organization and not-for-profit organization are not synonymous.

Nonprofits and not-for-profit organizations share several similarities, but also have a few key differences in charitable purpose, operations, and tax status.

Understanding what makes nonprofits unique from not-for-profit organizations is crucial, whether partnering with one, making a donation to one, or starting one. Here’s your guide to differentiating between the two and understanding which type of organization aligns with your needs and goals.

What is a nonprofit organization?

The nonprofit organization (NPO) definition is relatively straightforward: All NPOs serve the public good with a core mission. The money raised from donations must be put toward serving this charitable purpose.

To be a tax-exempt nonprofit, your organization must meet a wide range of Internal Revenue Code (IRC) requirements set forth by the Internal Revenue Service (IRS). You must also disclose your financial and operational information to the public. This high nonprofit transparency ensures it serves the public good.

Some prominent examples of these charitable organizations include:

• The Salvation Army
• World Central Kitchen
• American Cancer Society
• Concern Worldwide US
• Feeding San Diego
• Shriners Hospitals for Children
• Direct Relief

What is a not-for-profit organization?

Like a nonprofit, not-for-profit organizations (NFPOs) don’t distribute profits to owners. All money earned from fundraising activities or services must go directly back into running the organization.

However, the biggest difference between nonprofit and not-for-profit organizations is that NFPOs don’t have to operate for the public benefit. Instead, NFPOs serve the goals and objectives of the organization’s members. For this reason, these organizations have fewer requirements, especially tax-exempt status and operational transparency.

Common examples of not-for-profit organizations include:

• Credit unions
• Trade associations
• Professional organizations (such as bar associations or medical associations)
• Sports clubs or leagues Social or recreational clubs
• University alumni associations
• Homeowners associations

5 major differences between nonprofits and not-for-profit organizations

The factors that distinguish a nonprofit from a not-for-profit organization are subtle, but important, because they govern how each organization functions. While both types of organizations operate without distributing profits to owners, the differences in their tax status, legal structure, and operational requirements are significant enough to change how each is funded, governed, and regulated.

Understanding these distinctions is especially important when deciding which structure to pursue, evaluating a potential nonprofit partner, or making a donation and determining if it will be tax deductible.

Differences between nonprofits and not-for-profit organizations fall into the following five general categories.

Organizational purpose

A nonprofit must serve the public good and prove how it supports social causes. By contrast, not-for-profit organizations can serve the special interests of members and the organization itself.

Tax status

Regarding tax differences, to understand nonprofit versus not-for-profit organizations, know that for IRS tax purposes, there are 26 different types of nonprofit organizations. Most traditional nonprofits fall into the 501(c)(3) category of the IRC and have to meet certain criteria to fit into that tax-exempt status.

Although NFPOs can fall into a few IRS categories, most are 501(c)(7) organizations, including social causes or recreational clubs.

The primary distinction here is that nonprofit donations are tax deductible for donors, but nonprofits have a higher level of tax scrutiny. Most not-for-profit donors can’t write off their donations as tax deductions without some added steps.

Legal liability

Nonprofit organizations can exist as a separate legal and business entity from the business owner, like a traditional for-profit corporation. However, not-for-profit organizations are more like a general partnership, where the members cannot separate themselves legally from the organization. There are some exceptions to this rule, but it requires more work from the organization’s leadership.

Operational structure

To serve the public good, most nonprofit organizations rely on paid staff. Their work is supplemented by a team of loyal volunteers and held accountable by an external nonprofit board with volunteer board members.

On the other hand, not-for-profit organizations are typically solely reliant on volunteers and don’t often have a board of directors. If a not-for-profit organization employed someone full time, they would be subject to federal and state income tax.

Transparency

To retain tax-exempt status, nonprofit charitable organizations must make financial and operational records publicly available. This impacts nonprofit accounting practices and nonprofit financial audit processes.

Not-for-profit organizations don’t have the same financial regulations and operate much more like privately owned for-profit businesses in this way. It’s still a good idea for them to share these reports with members, even if it’s not a requirement.

Which structure is right for your organization?

The following considerations will help you decide how to structure your organization.

Nonprofits are best if your mission serves the public

A 501(c)(3) nonprofit is almost always the right choice if:

• Your organization’s primary purpose is charitable, educational, religious, or scientific
• You want to accept tax-deductible donations
• You want to apply for foundation grants
• You want to solicit corporate sponsors

A nonprofit designation comes with additional IRS requirements and transparency obligations, but the upside is that grant funding is exclusively available to 501(c)(3) nonprofits.

Not-for-profits are best if you exist to serve your members

Organizations that exist primarily to benefit their members are best served under a not-for-profit structure. Most of these fall under IRC Section 501(c)(7) for social and recreational clubs, or IRC Section 501(c)(6) for business leagues and trade associations. Unlike 501(c)(3) nonprofits, donations to these organizations are generally not tax deductible for donors.

The lighter regulatory burden and reduced public disclosure requirements can be a genuine operational advantage when the organization’s work isn’t intended for broad public benefit, and the primary audience is the membership itself.

Tax deductibility is often the deciding factor

A key deciding factor for structuring your organization is tax deductibility. If you want to raise significant money from the general public, individual donors, or corporate partners, donations to 501(c)(3) nonprofit organizations are tax deductible for donors, offering them a major incentive to contribute.

Donations to most not-for-profit organizations, however, aren’t tax deductible. If your fundraising strategy depends on donor deductibility, grant eligibility, or corporate matching programs, the nonprofit structure is the clear choice, even if access to these funding channels come with additional costs in compliance overhead.

Nonprofits have greater IRS scrutiny and compliance commitments

Nonprofit status comes with ongoing IRS reporting requirements, public financial disclosure via Form 990, and board governance obligations. Before pursuing 501(c)(3) status, ensure your organization has the operational capacity to meet these requirements consistently over time. For smaller, community-based member organizations where public fundraising isn’t a goal, however, the not-for-profit structure’s lighter compliance burden may be a better fit.

How are nonprofits and not-for-profit organizations similar?

It’s easy to understand why the general public views nonprofits and not-for-profit organizations interchangeably. Despite the differences, both are unique compared to for-profit companies and function in similar capacities.

The most notable similarity between nonprofits and not-for-profit organizations stems from how both handle money. In both cases, these community organizations funnel profits back into funding the organization rather than distributing any revenue to owners or shareholders.

Additionally, both acquire profits generally the same way, including general donations, fundraising events, corporate sponsorships, or paid services derived from members of the community. With the growth in corporate social responsibility, both nonprofit and not-for-profit organizations can find opportunities to benefit from partnerships with businesses. However, again, different reporting and compliance structures will apply.

Understanding the differences to inform your fundraising strategy

Both nonprofit and not-for-profit organizations are valuable organizations within communities but have different charitable purposes and, therefore, operate differently to accomplish their goals. It’s crucial to understand these differences when starting a charitable organization or partnering with one.

If you’re launching a nonprofit, explore GoFundMe Pro’s how to start a nonprofit in 9 steps and discover how GoFundMe Pro’s fundraising platform can help provide a world-class giving experience for anyone who lands on your donation site.

See GoFundMe Pro in action.

Not-for-profit vs. nonprofit FAQs

Is a church a nonprofit or a not-for-profit organization?

A church or religious organization is typically a nonprofit organized under Section 501(c)(3) of the Internal Revenue Code. Religious organizations were among the original categories Congress intended for tax-exempt status, and donations to them are generally tax deductible for donors.

However, religious organizations are exempt from the Form 990 annual reporting requirement that applies to most other nonprofits. Some smaller religious groups may operate as informal not-for-profit associations, but most established churches and religious institutions are structured as 501(c)(3) nonprofits.

Can a not-for-profit organization become a nonprofit organization?

Yes, a not-for-profit organization can convert to nonprofit status by applying for tax-exempt status with the IRS, typically by filing Form 1023 for 501(c)(3) status. This process requires the organization to demonstrate that it serves a qualifying charitable, educational, religious, or scientific purpose, not just the interests of its members.

The conversion also requires updated articles of incorporation, new bylaws, and a commitment to the transparency and reporting requirements that come with nonprofit status. Many organizations make this transition when they want to access grant funding or offer tax-deductible donations to attract broader donor support.

Do nonprofit organizations pay taxes?

501(c)(3) nonprofit organizations are exempt from federal income tax on income related to their charitable mission. However, they may owe taxes on unrelated business income, which is revenue from activities unrelated to their exempt purpose.

Nonprofits also remain subject to payroll taxes for employees and, in most states, aren’t automatically exempt from state and local sales or property taxes. The extent of these exemptions varies significantly from state to state.

Maintaining tax-exempt status requires ongoing compliance with IRS requirements, including annual Form 990 filing and restrictions on political activity.