Nonprofit Organizations and Not-for-Profit Organizations are terms that are often used interchangeably. However, there are key differences that make these types of organizations unique.
Both differ from for-profit organizations and overlap with each other in various ways. Namely, neither exists to make money. But their missions, tax implications, and business structures distinguish them from each other.
The following article will provide you with a concise understanding of each of these terms.
Let’s begin by defining what exactly nonprofit and not-for-profit organizations are.
A nonprofit organization (NPO), sometimes referred to as a “non-stock” organization is for the highly ambitious. What we mean by this is that NPOs are required to serve the public or have a primary mission to further a greater social cause.
NPOs conduct fundraising and aim to make a profit through donations and services rendered. However, every cent is used for the advancement of the organization. No one partaking is compensated by the organization. This means being willing to be fully transparent with donors and supporters.
Organizations such as hospitals, universities, and national charities and foundations are often examples of NPOs. Your cause could be public safety, animal welfare, climate change, sheltering the homeless, finding a cure for a disease, or advancing science and arts in some way. All of these social causes warrant a government application to start an NPO.
If you want to start a Nonprofit Organization and want it to truly succeed, you need to have a passion for “changing the world”. Visualize large and successful organizations such as Habitat for Humanity, the Make-a-Wish Foundation, Mayo Clinic/Foundation, or the Salvation Army.
NPOs may be time-consuming to set up, but once you’re in the flow, your NPO may be capable of unlimited growth.
On the other hand, a Not-for-Profit Organization (or NFPO) is a more casual, local organization often with a recreational purpose. It is not a requirement for an NFPO to benefit the public good and they are often smaller than an NPO.
It’s in the name. An NFPO does not earn profit for its owners. Once again, all money earned through business activities or donations goes right back into the organization. The overarching goal is to serve the internal members of the organization.
NFPOs can take the form of sports clubs or social clubs (such as college fraternities and sororities) while others can be for outreach. Examples of these include social organizations wherein members may focus on improving the lives of the homeless or supporting veterans and their families. This is on a smaller, more local scale than NPOs.
Community organizations, also outreach-oriented, aim to make changes in their community. This could take the form of renovating parks, planting more trees, or cleaning the roads.
Essentially, NFPOs bring together like-minded individuals with shared interests. This allows for social connection and a bonding experience. Think of NFPOs as an activity as opposed to an organization.
Now that we have described NPOs and NFPOs, let’s delve into the specific differences between them. This will provide more comprehensive clarity.
Briefly described above, NPOs and NFPOs have vastly different objectives.
NPOs are founded specifically to benefit an external cause or the public good. Individuals who work within an NPO aim to make the world a better place and help those in need.
NFPOs on the other hand do not operate for the greater good. These organizations are formed to benefit members only. This is the owners’ primary organizational objective.
Another difference is the management and structure of these two types of organizations.
Interestingly enough, a typical NPO structure is akin to that of a for-profit business in that they aim to earn a profit. They fundraise through donations, grants, endowments, and payments for services. These profits do not support any single member and are funneled directly into the advancement of the cause.
NPOs are legally required to make their financial information public for donors to see if and how their contributions are being used effectively.
Recreational NFPOs operate slightly differently. There is no goal of earning revenue. However, any money they do earn is also reinvested into the business, although not providing financial wealth to their owners.
NPOs and NFPOs differ in the way they support their employees.
NPOs provide paid meaningful employment for anyone willing to work hard. However, it is important to note that employees are not paid through fundraising for the NPO. Their salary is managed separately.
NPOs typically have a president or CEO, but no shareholders.
NFPOs, on the other hand, are composed fully of volunteers, so it’s important to know how to put together a great volunteer team.
Both NPOs and NFPOs can legally apply for tax-exempt status and both organizations will qualify. The difference is simply the governmental codes they would operate under. Tax-exempt refers to exemptions from property and sales taxes.
The difference here is that NPO donors may deduct any gifts from their income tax return. This is not the case for NFPO donors, so there are essentially fewer tax benefits of NFPOs. However, the paperwork is simpler!
On the topic of logistics, let’s move our attention toward legal entities.
The actual organization in an NPO is a separate legal entity from the founders or directors. This signifies that the organization as an entity has its own rights and obligations. The employees are the hands that work rather than the body of the organization itself.
In contrast, NFPOs do not qualify as business entities, therefore, an NFPO cannot have a separate legal entity.
If you’re looking towards making the world a better place with the help of willing employees and tax-exempt donations, start an NPO. And although there are fewer tax benefits and reliance is fully on volunteers, an NFPO allows for bonding over shared interests with your local community members.