Nonprofit vs. Not-for-Profit vs. For-Profit

There are plenty of confusing terms in the world of business and philanthropy, but few are as eyebrow-raising as “nonprofit” and “not-for-profit.” The names sound similar, but they’re very different. It’s not quite so simple as “they’re the opposite of for-profit businesses.” (Which is another wrinkle to all this!)

Understanding the distinctions between nonprofit vs. not-for-profit vs. for-profit is fundamentally important for business owners. Whether you’re starting a new organization or you’re looking to donate or invest in another organization, it’s vital to understand the distinctions between these three models. Here, we clarify the distinctions by looking at their primary missions, financial models, and tax implications.

What is a Nonprofit?

A nonprofit is a specific legal designation in the United States. It typically means an organization has a charitable, educational, religious, or scientific purpose. Basically, these organizations exist to serve a public or mutual benefit, and all revenue they generate must be reinvested back into the organization to support its mission. That means any donations, grants, or the sale of related goods and services have to support the mission.

Importantly, that doesn’t mean it can’t have paid employees or administrators. Rather, no surplus revenue can be distributed to private individuals because the organization takes no profit.

To be considered a true nonprofit in the US, an organization must receive official recognition from the IRS as a tax-exempt entity, such as a 501(c)(3).

Examples include the Red Cross, Habitat for Humanity, and St. Jude Children’s Research Hospital.

What is a Not-for-Profit?

A not-for-profit is a broader category that describes organizations that don’t have profit as their main objective. A nonprofit is a specific type of not-for-profit, but the term extends to include groups whose missions aren’t necessarily charitable.

Like nonprofits, they can’t distribute any profit to members, directors, or owners. Instead, any surplus revenue must be used to sustain the organization’s activities and mission. Essentially, not-for-profits serve members of the organization, rather than the public good. Because of this focus, not-for-profits have fewer governance and public disclosure requirements, but are also typically subject to more local, state, and federal tax obligations.

Examples include local social clubs and professional associations, as well as bigger names like the NFL (a trade association for its member teams) and the Boy Scouts of America.

What is a For Profit?

The most common type of business entity, a for-profit organization, is simply one that is driven to generate profit for its owners or shareholders. It exists to make money! These companies are legally allowed to distribute profits to investors as dividends or other returns, and are subject to corporate governance and tax regulations.

Key Differences Between Nonprofit vs. Not-for-Profit vs. For Profit

The most significant difference between nonprofits vs. not-for-profit vs. for-profits is in their primary purpose. For-profits are financially driven to produce a return for stakeholders and shareholders. Both nonprofit and not-for-profit organizations are driven by a specific mission or purpose unrelated to generating a personal profit. (Yes, the NFL astonishingly retains not-for-profit status even after giving up its nonprofit status years ago.)