Nonprofit vs. Not-for-Profit vs. For Profit: Key Differences
By Indeed Editorial Team
Updated December 30, 2022
Published July 13, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
There are a few profit structures an organization may choose from to best suit its goals, mission and purpose. Leaders may decide to create a nonprofit, not-for-profit or for profit depending on what they hope their organization may accomplish. Understanding the differences between these three structures can allow an organization's executives and team members to understand how to support its goals effectively.
In this article, we explore the differences between nonprofit, not-for-profit and for-profit organizations, including their sources of funding, staff payment and tax exemption status.
Nonprofit vs. not-for-profit vs. for-profit
Here are the key differences between these types of organizations:
Here's an overview of what nonprofit, not-for-profit and for-profit organizations are:
A nonprofit organization (NPO) is an organization with a mission and purpose to serve society and benefit the public. An NPO collects payments or donations for providing services, but it uses profits to further advance the organization as opposed to investing in business growth or the individual wealth of the owner.
Nonprofits qualify for specialized tax exemption with the Internal Revenue Service (IRS), so they don't have to pay taxes on the money they receive through fundraising. This also means these organizations must publicly disclose how much they earn and how they use funds.NPOs can operate for educational, public safety, public health, research, religious or other beneficial purposes. Some nonprofit organizations include:
Universities and colleges
A not-for-profit organization (NFPO) is an organization that funnels all profits back into the organization's operations and doesn't provide financial wealth to its owners. These organizations don't have to serve the public and can just serve the needs and objectives of their members, though some not-for-profit organizations serve beneficial public purposes.Some NFPOs include:
Public welfare organizations
A for-profit organization, more commonly referred to as a "business" or "company," is an organization that provides products or services to the public and uses profits to invest in growing the organization and earning wealth for its owners and shareholders.Some for-profit organizations include:
Here are examples of nonprofit, not-for-profit and for-profit organizations:
St. Paul Charity Hospital provides emergency medical services, diagnostic testing and surgical treatments to patients in and around the city. As a nonprofit, It uses payments from insurance and donations to accomplish its goals. St. Paul Charity Hospital uses this funding to improve medical technologies, expand the hospital's campus and services, pay the staff and treat patients.
Sunset Valley Sports Club provides its members with access to athletic and exercise equipment, tennis courts, a swimming pool and health, wellness and exercise courses. As a not-for-profit organization, all membership fees and donations go toward improving the organization and maintaining its operations. This means memberships and donations don't contribute to profit for the organization itself.
Dove's Coffee sources coffee beans, roasts and grinds coffee and sells its products directly to consumers online and to retailers. This organization uses profits to increase its owner's and shareholders' wealth and to grow the business. This means it's a for profit business, focused on financial growth and success.
Purpose and mission
All nonprofit organizations benefit the public using fundraising, donations and other financial payments. Some not-for-profit organizations may also benefit the public, but most use profits to achieve the owner's organizational goals.
For-profit organizations only focus on achieving business objectives and growing the wealth of their owners and shareholders. Many for-profit businesses also donate money or partner with charities, foundations, associations and other nonprofit or not-for-profit organizations to serve the public good.
Tax exemption status
These three organization types make an income they use to pay staff, fund development projects and meet business objectives, but each type handles its taxation differently:
Nonprofits: Nonprofit organizations qualify for tax-exempt status under the 501(c)(3) status.
Not-for-profits: Not-for-profits qualify for some tax exemptions when they earn a 501(c) status like 501(c)(7). For example, some not-for-profits don't have to pay sales tax or property taxes.
For-profits: These organizations don't qualify for 501(c) tax exemption, but may get tax deductions for things like business expenses, employee salaries and benefits and charity donations.
Related: Nonprofit vs. Not for Profit
Sources of funding
Nonprofits typically gain revenue through fundraising efforts, donations, membership dues and grants. Some not-for-profit organizations may also receive donations, membership dues and grants, but some also earn profits from sales, depending on their function and operations. For-profit businesses receive funding from owner contributions, investors, shareholders, business grants and loans. Then, they gain revenue through sales profits and investment dividends.
Related: 5 Types of Funding for Businesses
Both nonprofits and not-for-profits can have a mixture of volunteers who don't earn an income and employees who earn an income with the organization. They use funds to pay employees first and then funnel the rest of the profit back into maintaining the organization's operations.
In contrast, for-profit organizations hire individuals who receive payment for their services, but these organizations don't have volunteers. A for-profit organization can also hire unpaid interns for lower-level positions.
Dividends and shareholders
Nonprofits and not-for-profit organizations don't pay dividends or earnings on investments in the organization. For-profit businesses pay dividends to shareholders, whether the company is public or receives funding from private investors. A shareholder is someone who owns stock in a company, giving them equity in the business.
Read more: What Is a Shareholder?
Scope and scale
Nonprofit organizations can have a wide scope of the populations they serve and can scale up to regional, national or international organizations. Not-for-profits typically have a smaller scope of the population they serve, though they can scale to regional, national and international populations after growing financially and in popularity. For-profit businesses can start and stay small, or they can start small and grow into a large corporation that serves people nationally and internationally.
Which type should you work for?
Here are some reasons to work at each of these types of organizations:
Why work at a nonprofit
You might consider working for a nonprofit if you want to:
Serve your community or a certain population as opposed to building personal wealth
Manage donations and hold fundraising opportunities
Be at a tax-exempt organization
Why work at a not-for-profit
Consider working at a not-for-profit if you prefer to:
Serve a small part of your community or a certain group of people
Receive membership dues, donations or gains from sales of refurbished products
Work at an organization with some tax exemptions
Why work at a for-profit business
You might work at a for-profit business if you want to:
Sell products or services to consumers and use the profits to gain wealth for the organization
Get funding from private investors
Work for a publicly-traded company
Tips for converting organization types
It's possible to start one type of organization and then convert it to a different type of organization. How complex the process is and whether the IRS is likely to approve it depends on which type of organization you start with and to which type you're converting. Here are some conversion tips:
Nonprofit to for-profit
You may convert a nonprofit organization to a for-profit business to get better access to loans and other funding or to run the organization without the strict regulations of the 501(c)(3) status and other nonprofit organization rules. This process involves providing the IRS with a written statement of nonprofit conversion that includes:
Why the organization is terminating its nonprofit status
A liquidation plan for the organization's assets
The organization's fair market value
A list of anyone who will receive assets during distribution
For-profit to nonprofit
The process of converting a for-profit organization to a nonprofit is similar to starting a brand-new nonprofit organization. The IRS wants to make sure that businesses only make this conversion to use their funds to serve a beneficial purpose for the public rather than to avoid paying taxes. This conversion process involves steps like:
Writing a mission statement for the nonprofit organization
Creating bylaws to govern the nonprofit
Filing articles of incorporation with a note about keeping the same name as the current for-profit organization
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