Nonprofit vs. not-for-profit: What’s the difference?

Nonprofit vs. not-for-profit. Hands up, who thought the two were the same thing? While the two terms might seem interchangeable, they represent two distinct types of organizations.

They share many similarities, however. Both aim to serve their communities without making a profit, but they differ in their missions, business structures, tax implications, and accounting needs. 

This article will dive into the definitions of not-for-profit and nonprofit organizations, explore their key differences and similarities, and discuss important accounting considerations to keep in mind. 

Here’s what we cover:

What is a nonprofit organization?

Your nonprofit organization exists to serve a greater good rather than turn a profit.

Your organization may typically focus on public service, addressing social causes, and supporting communities through its work. It could come in many forms, such as charities, foundations, educational institutions, religious groups, and hospitals. 

While each nonprofit organization has a specific mission, their shared purpose is to positively impact society and help those in need. Unlike a for-profit business, your nonprofit doesn’t distribute profits to shareholders.

However, it still needs to generate revenue to sustain operations. Your nonprofit would do this through donations, grants, and endowments, with all funds going directly toward advancing the causes it supports. 

Because its purpose is centered around public benefit, your nonprofit in the US enjoys tax-exempt status under the IRS 501(c)(3) code. This means it isn’t required to pay taxes on the donations and other forms of income it receives, provided it meets the criteria established by the IRS. 

What is a not-for-profit organization?

Unlike nonprofits, which focus on benefiting the public or a social cause, not-for-profit organizations are set up to benefit their members rather than owners or shareholders.

Any money your non-for-profit raises is reinvested directly into the organization to help achieve its goals rather than being distributed as profits. 

Interestingly, “not-for-profit” isn’t an official legal term, even though it’s commonly used. Legally speaking, these organizations are considered “exempt organizations” under the IRS’s broader category of “other nonprofits.” 

These organizations can include social welfare groups, community organizations, veterans’ clubs, social clubs, and civic leagues. While not-for-profits don’t necessarily aim to serve the general public, they still play an important role by fulfilling the needs of their members.

For instance, your local football club might raise money to buy new uniforms, or a community group may work on renovating local parks near you. 

As a not-for-profit, you can apply for 501(c)(3) status with the US IRS. Your not-for-profit might also be tax-exempt under different sections of the IRS code, such as 501(c)(7) for social and recreational clubs, 501(c)(4) for social welfare organizations, or other applicable sections.

Differences between nonprofit and not-for-profit organizations

While nonprofit and not-for-profit organizations share the common goal of serving their communities without making a profit, there are some key differences to keep in mind:

Mission and objectives 

As a nonprofit organization, you’re all about benefiting the public. Your mission addresses social issues, such as hunger relief or medical care.

On the other hand, if you’re involved in a not-for-profit, you’ll concentrate on fulfilling your own objectives and serving your members’ needs rather than the broader community. 

Management and organization structure 

Nonprofits tend to be structured like for-profit businesses, with a combination of paid staff and volunteers. Your nonprofit aims to generate revenue to support your mission and sustain your programs.

Not-for-profit organizations are typically run by volunteers and your aim in this type of organization is to raise just enough funds to support your specific goals.

Legal status 

One significant advantage for a nonprofit is that it can establish a separate legal entity, which allows it to conduct business more formally.

In contrast, your not-for-profit organization doesn’t have that option. It operates as part of a collective membership, which shapes its governance and activities.

Tax implications 

Your nonprofit organizations can obtain 501(c)(3) tax-exempt status, which not only helps it operate but also allows your donors to make tax-deductible contributions.

Not-for-profits may fall under various 501(c) sections (like 501(c)(7) for social clubs) too, but most donations aren’t tax-deductible (there are some exceptions). 

Scale and revenue sources 

Nonprofits are generally larger organizations and rely on a mix of donations, grants, and memberships to fund their missions. They often need specialized tools to manage their complex financial landscapes effectively.

For example, accounting software for foundations and philanthropic charities can help your organization streamline its financial processes and ensure compliance.

By contrast, not-for-profits are often smaller in scale and generate revenue mostly from sales, membership fees, or fundraising activities.

Financial reporting 

Nonprofits must maintain transparency and disclose their financial information. This is so donors and the public can easily see how their contributions are being used to advance the mission.

On the other hand, your not-for-profit isn’t obligated to publicly report its financials, which can limit transparency and accountability.

Aspect	Nonprofit organizations	Not-for-profit organizations
Mission and objectives	Aim to benefit the public by tackling social issues like hunger or healthcare.	Focus on serving their members’ needs rather than the wider community.
Management structure	Operate like for-profit businesses with paid staff and volunteers.	Typically run by volunteers, raising funds for specific goals.
Legal status	Can establish a separate legal entity to conduct business.	Don’t have a separate legal entity; operate collectively.
Tax implications	Qualify for 501(c)(3) status, making donations tax-deductible for donors.	Fall under various 501(c) sections (like 501(c)(7)); donations are usually not tax-deductible.
Scale and revenue	Generally larger organizations, relying on donations, grants, and memberships.	Often smaller, generating revenue from sales, dues, or fundraising.
Financial reporting	Required to disclose financial information for transparency.	Not obligated to report finances, which may limit transparency publicly.

Similarities between nonprofit and not-for-profit organizations

Despite their differences, nonprofits and not-for-profits share some similarities, including:

Shared mission focus 

Neither nonprofits nor not-for-profits earn a profit for their owners. Both organizations are dedicated to serving their communities and causes, fulfilling their missions, and addressing the needs of those they serve.  

Donations acceptance 

Both types of organizations can accept contributions from individuals and businesses, which is essential for funding their programs and activities. Although not all not-for-profits can offer tax-deductible donations, you can still effectively raise funds for your not-for-profit.

Tax-exempt status 

Both nonprofit and not-for-profit organizations can apply for tax-exempt status with the IRS. Making sure your organization stays compliant with IRS regulations is essential to maintain this important status.

Nonprofit vs. not-for-profit examples 

Understanding the differences between a nonprofit and a not-for-profit organization can be tricky if you’ve always used the terms interchangeably. To help contextualize the differences, here are nonprofit vs. not-for-profit examples:

Examples of nonprofit organizations 

Here are examples of large, well-known US nonprofit organizations: 

• American Red Cross 

• Habitat for Humanity 

• Healthcare for the Homeless 

• Make-A-Wish Foundation 

• The Salvation Army 

• Feeding America 

• American Heart Association 

• Human Rights Watch 

• World Wildlife Fund 

• YMCA 

Examples of not-for-profit organizations

Here are fictitious examples of not-for-profit organizations by different categories: 

• Social welfare organization, e.g., Helping Hands Community Group—a group working to provide food and job training for local families in need. 

• Social clubs, e.g., Garden Enthusiasts Club—a fun group for gardening lovers sharing tips and hosting community planting days. 

• Labor organizations, e.g., Artisan Workers Union—a group representing local artisans, advocating for fair pay and safe working conditions. 

• Veterans’ organizations, e.g., Veterans Connect—a support network offering resources and social events to veterans and their families. 

• Business leagues, e.g., Downtown Business Network—a group that promotes local businesses and helps them connect through networking events. 

• Cultural organizations, e.g., Local Arts Collective—a group celebrating local artists through exhibitions and workshops, fostering a love for the arts. 

• Religious organizations, e.g., Community Faith Center—a church that provides spiritual support and outreach programs for families in the area. 

Choosing the right structure for your organization

If you’re passionate about a cause and want to establish an organization, how do you decide between forming a nonprofit or a not-for-profit? It comes down to the purpose and goals of your group.  

A nonprofit structure may make the most sense if your mission focuses on serving your wider community or addressing social issues. If you structure your organization this way, you can apply for 501(c)(3) status, which grants you tax-exempt benefits and makes raising money for your cause easier. 

On the other hand, if your organization is designed to benefit a smaller, specific group, like a sports club or a local entrepreneur network, then a not-for-profit structure could be more appropriate.

While you can still qualify for tax-exempt status, donations wouldn’t be tax-deductible for your supporters.  

Simplify your finances with nonprofit accounting and management software

You’ve explored the differences between nonprofit vs. not-for-profit organizations. While both share similar goals, they vary in tax status, revenue sources, and financial reporting requirements.  

Nonprofit accounting requirements are arguably more rigorous because they focus on transparency and accountability to donors. And that’s where nonprofit accounting software comes into play.

For nonprofits, accounting and management software is essential for managing financial data, ensuring compliance, and maintaining nonprofit internal controls that safeguard financial health.  

Below are some key features to look for when you’re considering software options:

• Financial reports and dashboards: stay on top of your organization’s financial health and share transparent financial donor updates with easy-to-create reports and customizable, real-time dashboards for nonprofits. 

• Revenue recognition: automate revenue management with intelligent tools that ensure your nonprofit complies with regulations. This feature is handy if your nonprofit generates multiple revenue streams, such as donations, grants, and program fees. 

• AI-powered efficiency: AI-driven workflows can help streamline routine accounting tasks, like reporting and reconciliation, saving your nonprofit valuable time and resources. You can focus more on driving your mission forward and less on manual administrative tasks. 

• Grant tracking and billing: the right solution should make it easier for you to track, manage, and report on grants, ensuring accurate billing, reimbursement, and audit readiness. This will help your organization maintain compliance and build trust with your funders. 

Case study: How Room to Read turned a new page

To illustrate how specialized financial software can elevate efficiency, let’s look at Room to Read’s story—a nonprofit supporting girls’ education and literacy programs.  

Room to Read was using a server-based general ledger tool, but decided to upgrade to a cloud-based system, with a more solid and flexible financial infrastructure.  

“Our financial information simply wasn’t granular enough to add meaningful insights like cost per activity or investment per child.”  -Shari Freedman, CFO 

The organization invested in a dynamic solution that could adapt to its increasing operational complexities and long-term growth ambitions, offering global support for accounting and finance staff around the world.  

With the new system in place, there’s no longer a need to rely on Excel spreadsheets or spend hours on manual, duplicate data entry. It has dramatically reduced the work needed for the organization to close its books in each country. 

As a result, Room to Read has boosted productivity by 25% and increased revenue by 15%, reaching 121,000 more children through literacy and education programs. 

Take a look at Room to Read’s full story.

Nonprofit vs. not-for-profit FAQs

Can a nonprofit also be a not-for-profit? 

Technically, yes. From a tax perspective, nonprofit and not-for-profit organizations are eligible for 501(c)(3) status because they are charitable organizations that don’t distribute profits to shareholders or individuals.

However, not-for-profits cover various groups that might focus on specific interests rather than serving the public good. Because of this, they often fall under different sections of the tax code, making them distinct from traditional nonprofits. 

Can a not-for-profit make a profit? 

Not-for-profit organizations don’t generate profits for their owners. Instead, any funds your not-for-profit earns or donates are reinvested into your organization to help it pursue its goals and better serve the community. Importantly, these funds aren’t distributed to members, directors, or officers. 

Are donations to not-for-profits tax deductible? 

Donations to US not-for-profit aren’t typically tax deductible as they operate under various sections of the IRS tax code that don’t allow this. There are some exceptions.

For example, donations to certain not-for-profits, like volunteer fire departments, may be deductible. It all depends on your organization’s tax code. 

Do nonprofits and not-for-profits have different accounting requirements? 

Yes, they do. Nonprofits, especially those under 501(c)(3), must file Form 990 with the IRS annually and publicly share their financial information. If you receive significant funding as a nonprofit, an audit may also be required.

Not-for-profits have more straightforward reporting requirements and only file Form 990 if they meet specific criteria. They also don’t need to undergo audits unless their funding demands it.

How does nonprofit accounting differ from for-profit accounting?

There are plenty of differences between nonprofit and for-profit accounting in the US. For example: 

• Nonprofits report on fund usage, whereas for-profits focus on profitability. 

• Nonprofits recognize revenue on receiving donations, whereas for-profits do this when income is earned. 

• Nonprofits track funds by purpose, whereas for-profits use a single financial statement. 

• Nonprofits prepare a tax-exempt form and statement of activities, whereas for-profits prepare a balance sheet and income statement. 

• Nonprofits are tax-exempt and can receive tax-deductible donations, whereas for-profit pay taxes on profits and don’t offer tax deductions.