Definition
Non-profit organizations refer to entities that are established to serve a particular social or public benefit purpose, with any excess earnings reinvested back into furthering their mission. Not-for-profit organizations similarly don’t distribute their surplus funds to owners or shareholders, but are often smaller, informal, or volunteer-based groups dedicated to a specific cause or shared interest. Essentially, every non-profit is not-for-profit, but not every not-for-profit is a non-profit due to different legal structures and operational methods.
Key Takeaways
- Non-Profit organizations are entities that are structured to promote a cause or provide a public service, with all proceeds being reinvested towards their mission. They benefit from certain tax exemptions.
- Not-for-Profit entities also do not distribute profits to owners or shareholders, but they typically operate for the benefit of a group of individuals. They may generate profits but these are used to sustain activities rather than rewarding shareholders.
- Though often used interchangeably, the difference between Non-Profit and Not-for-Profit organizations mainly lies in their objectives, structure, and how they use their surplus. However, both types cannot distribute profits to the organization’s members.
Importance
The distinction between “Non-Profit” and “Not for Profit” is significant in the world of finance due to the different implications they have on the organization’s purpose, structure, and use of generated income.
A Non-Profit organization typically operates to serve the public interest, where profit is not the driving objective, and any surplus funds are used to drive their mission further.
On the other hand, a Not for Profit organization does not distribute its surplus funds to owners or shareholders, but retains them for its future projects, expansion and activities.
Understanding the difference between these two terms is vital for financial planning, tax purposes, strategic decision-making and governance, and proper categorization under law and regulations.
Explanation
Non-Profit and Not-for-Profit organizations both function primarily to provide a service or benefit to the public, without the primary aim of making profits to be distributed to shareholders or owners. Instead, any surplus funds are reinvested back into the organization to further its mission. The purpose of these organizations can be quite varied, including social services, education, healthcare, arts, and many more fields.
They typically operate on the basis of contributions, grants, and fundraising activities, and they can enjoy certain tax-exempt privileges provided they meet criteria set out by the government. The main distinction between Non-Profit and Not-for-Profit lies in their structure and the manner in which they operate. Non-profits are typically more formally structured and are usually run by a board of directors.
They also often have paid staff and larger operating budgets. Their purpose is generally more public-facing and broader in nature. On the other hand, Not-for-Profits are often smaller, less formal groups that may be entirely volunteer-based.
Their purpose may be more focused or specific, and they generally operate on a smaller scale. Regardless of their structure or scale, both types of organization exist primarily to fulfill a purpose or mission that benefits the public, rather than to generate profits.
Examples of Non Profit vs Not for Profit
American Red Cross (Non-Profit): This is one of the most famous non-profit organizations globally. It was established to provide emergency assistance, disaster relief, and disaster preparedness education in the United States. The American Red Cross uses funds and donations it receives to directly offer help to those in need.
National Geographic Society (Non-Profit): The National Geographic Society is another well-recognized non-profit entity. It uses its funding to encourage knowledge and understanding about the world and all its inhabitants, conducting scientific research, and pushing for preservation of natural resources.
Rotary Club (Not-for-Profit): The Rotary Club is typically considered a not-for-profit entity. This organization exists for social causes such as promoting peace, fighting diseases, providing clean water and sanitation, enhancing maternal and child health, supporting education, and growing local economies. The club members typically do not make money from the organization, but they use all funds for societal improvements.It should be noted that the terms “non-profit” and “not-for-profit” are often used interchangeably. However, they can have subtly different implications based on the jurisdiction and country. Generally, non-profits refer to organizations that are designed to serve the public benefit, with profits reinvested into their mission, while not-for-profits are typically group activities such as sports clubs, where any surplus must also be reinvested and not distributed to members.
FAQ: Non Profit vs Not for Profit
What is a Non Profit organization?
A Non Profit organization is an entity that is created to serve a public benefit or a specific social cause. The primary aim of a Non Profit is not to generate profits but to channel all revenues and resources in fulfilling their mission.
What is a Not for Profit organization?
A Not for Profit organization is similar to a Non Profit in that its main aim is not to generate profits but to serve a specific purpose. However, Not for Profit is more informal and can refer to a wide range of activities that do not aim to make profits, such as hobby clubs, sports clubs, and individual fundraising activities.
What are the differences between Non Profit and Not for Profit organizations?
While both types of organizations do not operate to generate profits, Non Profit organizations are typically larger and more formal institutions such as hospitals, universities, and charities. Not for Profit activities tend to be smaller and more informal. Non Profit organizations are required to be registered and abide by a specific set of regulations, while not for profit activities do not require such formalities.
Can a Non Profit organization generate revenues?
Yes, a Non Profit organization can generate revenues. However, these revenues must be used towards achieving the organization’s mission and cannot be distributed to owners or shareholders.
Can a Not for Profit activity generate profits?
A Not for Profit activity can generate surplus revenues, but these typically go back into the organization’s activities and cannot be used for personal gain. It’s important to note that the definition and regulations of Not for Profit activities can vary greatly depending on local laws and cultural norms.
Related Entrepreneurship Terms
- Tax Exemption
- Charitable Contributions
- Public Sector
- Revenue Generation
- Volunteer Management
Sources for More Information
- Internal Revenue Service (IRS): The IRS website provides detailed information on non-profit and not-for-profit classifications and tax rules.
- Investopedia: This platform delivers articles outlining the differences between a non-profit organization and not-for-profit entities in detail.
- The Balance Small Business: Offers expert advice on financing and managing small businesses and has resources to understand non-profit and not-for-profit organizations.
- Nonprofit Quarterly: This publication provides in-depth analysis and reporting on key issues affecting non-profit and not-for-profit organizations.
