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Girl working at a charityNon-profit and not-for-profit organizations sound similar but they’re quite different in terms of tax status and fundraising. Whether you’re interested in setting up a non-profit or not-for-profit, or you’re planning to make donations to either one as part of a fundraising campaign, it’s important to understand how they work and how they differ.

Non-Profit Organization, Definition

A non-profit is a business entity that has tax-exempt status from the Internal Revenue Service. That means they pay no income tax on the money they raise. When you donate money to a qualified non-profit, you can potentially deduct those donations on your taxes if you itemize using Schedule A.

Non-profits operate to promote specific causes or provide services to the community without realizing any profits in return. Any money that flows into the business, whether it’s through charitable donations or other sources, is used to fund the non-profit’s operation. For example, that may mean paying the lease on a building the non-profit operates from or paying for marketing to promote a fundraising campaign.

Non-profits can be classified according to which IRS code they fall under for tax-exempt status. For example, one status applies to non-profits that are organized by an Act of Congress while another status may apply to non-profits that operate as foundations. Generally, the majority of non-profits are charitable organizations. They can support a variety of causes, from the fine arts to feeding hungry children to raising awareness about specific diseases or illnesses.

Types of non-profits can include:

  • Social advocacy groups
  • Civic leagues
  • Social welfare organizations
  • Trade and professional associations
  • Fraternal societies
  • Teacher’s retirement fund associations
  • State-chartered credit unions
  • Veterans’ organizations
  • Religious associations

Non-profits can be run primarily by volunteers and a non-profit board of directors. The board is responsible for overseeing operations and making sure the non-profit is following practices that are designed to help further its mission.

What Is a Not-For-Profit?

Medical aid in a large container being moved by a forklift

A not-for-profit organization typically doesn’t have tax-exempt status, except in limited circumstances. That means they must pay income tax on the money they receive. Like non-profits, they don’t earn profits for their owners. Any money that comes in is reinvested into the business and funding its operations and initiatives. In that sense, a not-for-profit is very much like a non-profit.

In terms of structure, not-for-profits can choose to incorporate or not. They tend to be smaller than non-profits, however, and operate for a very specific reason. For example, an alumni club at a university may exist as a not-for-profit solely to raise money for the school’s sports teams. Not-for-profits may be run by volunteers or have part- and full-time employees. If employees are paid a salary for their work, then the not-for-profit is responsible for paying payroll tax on that money.

Non-Profit vs. Not-for-Profit: How do They Differ?

In a lot of ways, non-profits and not-for-profits look the same. They can both collect donations through fundraising to advance their mission or cause. They can both operate using volunteers and neither one pays out any profits to their members.

Where the two distinguish themselves is taxation and financial practices. A non-profit, for example, is obligated to make its financial practices public so that the community at large can see how donations are being used. Not-for-profits aren’t required to disclose this information.

In terms of their purpose, a non-profit may be focused on social causes while not-for-profits may involve special interests. For example, you might form a non-profit if you want to support cancer research while a not-for-profit may be more appropriate for supporting a local business or professional association.

A non-profit can be chartered by the state, while a not-for-doesn’t have to meet this requirement. Additionally, a not-for-profit may not elect a board to oversee the organization the way a non-profit would.

Which One Should I Set up?

If you’re interested in starting an organization to promote a specific cause or serve a particular need in your community, you may be wondering whether it’s better to go the non-profit route or the not-for-profit route. The easiest way to determine which one is right for you is to look at your purpose and goals.

When your mission is community focused on social, political, environmental or economic activities, then a non-profit structure could make the most sense. You’d get the benefits of having tax-exempt status, not to mention you may find it easier to raise money for your organization if you’ve established yourself as a non-profit.

A not-for-profit, on the other hand, could be the better choice if your activities revolve around supporting a common interest on a smaller scale. If you want to start a local women’s business owner’s league, for example, then you could set up a not-for-profit to help raise money for it. The difference is you wouldn’t be eligible for tax-exempt status from the IRS.

The Bottom Line

Medical worker checks the heartbeat of a small, impoverished childNon-profit and not-for-profit aren’t synonymous, and there are some important ways they distinguish themselves from one another. If you’re planning to launch a charitable initiative or fundraising activity to benefit your community, it helps to understand the ins and outs of each status before getting started.

Consider the costs as well. For example, if you’re planning to incorporate your non-profit and apply for a state charter, you’ll need to have money on hand to cover those fees.

Tips for Charitable Planning

  • A financial advisor can help you align your financial plan with your values, whether that means donating to charities or investing in socially responsible companies. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • It’s important to many people to make sure that groups they donate to are qualified charities. It’s also important to exercise caution with charities that have bad reputations.

Photo credit: ©iStock.com/SDI Productions, ©iStock.com/ugurhan, ©iStock.com/hadynyah

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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