What is a not-for-profit organization?

A not-for-profit organization does not earn any profits for its owners. Instead, the organization donates
the money it receives to help fund the organization’s objectives and goals. A not-for-profit might also
use received donations to stay up and running.

In many cases, not-for-profits are tax-exempt, meaning they are not required to pay most taxes.
However, businesses are not automatically exempt.

To achieve tax-exempt status, you must apply for it through the IRS. Qualifying not-for-profit
organizations can apply for 501(c)(3) status to become exempt from federal income tax.

For-profit vs. not-for-profit

The main difference between for-profits and not-for-profits is how the organization handles its profits. A
for-profit organization or business distributes profits to owners.

Although they may differ when it comes to handling profits, for-profits and not-for-profits do have some
similarities. Typically, not-for-profits use the same business strategies and techniques as for-profit
organizations. Both organizations set goals and want to reach them.

A for-profit business can participate in a wide range of activities. On the other hand, not-for-profit
organizations must exclusively operate as a charity or for scientific, religious, or public safety purposes.

Not-for-profits vs. nonprofits

Many people mistake not-for-profits and nonprofits to be the same thing. However, they are not. Take a
look at the differences between nonprofit and not-for-profit services below.

Organization’s purpose

Not-for-profit: Supports a cause, activity, or the community

Nonprofit: Supports charitable, educational, or religious purposes

Uses of profits

Not-for-profit: Funds activities, hobbies, and recreation related to their cause or goal
Nonprofit: Profits are used to support the organization’s cause or goal, but funds can also be used to pay
for employee salaries and administrative need

Type of employees

Not-for-profit: Volunteers, paid staff, or a mixture of both

Nonprofit: Could have paid staff as well as paid volunteers

Tax-exemption availability

Not-for-profit: Yes (must be both state and federal levels)

Nonprofit: Yes (must be both state and federal levels)

Stock option availability

Not-for-profit: No

Nonprofit: No

Types of not-for-profits

There are a couple of different types of not-for-profits. Some examples of not-for-profit organizations
include:

Social organizations

Community organizations

what is a not-for-profit organization

Social organizations

Social organizations strive to improve or cater to social causes. These organizations may assist the
homeless, provide free legal services, or help veterans find work.

A social organization’s earnings typically come from donations or profits made from selling goods. Social
organizations might use any profits to provide services to those in need or to fund the organization’s
goals and operations (e.g., supplies).
Community organizations

Most not-for-profit organizations are considered community organizations. They could range from small
local groups to larger agencies with branches across the country.

Individuals establish community organizations to help with causes around the community. Some causes
that community organizations might help with include cleaning up the community, improving
neighborhoods, and promoting recycling locally.

Who can start a not-for-profit?

Anyone can start a not-for-profit. Most individuals start not-for-profits because they see a need in their
community or the world (e.g., homelessness). Keep in mind that not-for-profits must be for causes
relating to scientific, religious, or public safety purposes.

If you want to start a not-for-profit, you need to research the problem at hand. And, like other
entrepreneurs, you must create a business plan. When establishing your business plan, outline the
problem, your objectives, and how you plan to reach your goals.

Not-for-profit takeaways

If you’re a little perplexed about not-for-profits, don’t worry. Check out a summary of the key points
about not-for-profits below.

A not-for-profit:

Owners make little to no profits

Can be tax-exempt

Is established to help with a cause or the community

Has volunteers or paid staff (or both)

Can be started by almost any individual who has a legitimate charity or cause