What Is Not-for-Profit and How Is It Different from a Nonprofit?

The terms “not-for-profit” and “nonprofit” are often used interchangeably, leading to confusion among individuals and organizations looking to establish mission-driven entities. While both operate with a purpose beyond generating profit for owners or shareholders, they have distinct legal, financial, and operational differences that affect how they function and are regulated.

Understanding these distinctions is important for ensuring compliance, maximizing tax benefits, and structuring the organization for long-term success. In this article, we will clarify the differences between a not-for-profit and a nonprofit, explore how each is structured and taxed, and explain why selecting the right entity matters for achieving organizational goals.

What is Not-for-Profit?

A not-for-profit organization operates without the goal of generating income from for-profit businesses for individuals or members. Instead, it focuses on activities that support a specific group, cause, or interest. Unlike traditional companies, not-for-profit organizations don’t distribute surplus revenue to individuals but instead reinvest any earnings into their programs and operations.

Definition and General Characteristics

A not-for-profit organization is established with a specific purpose in mind, often centered around social, recreational, or community-based activities. Unlike businesses designed to generate profits for owners or shareholders, not-for-profits focus on advancing a mission that benefits a particular group or cause.

One defining characteristic of not-for-profits is how they handle revenue. Any extra funds earned through activities, donations, or membership fees are reinvested into the organization to support its programs and services. Unlike for-profit businesses, these organizations do not distribute profits as personal earnings to members, founders, or directors.

From a tax perspective, some not-for-profits qualify for tax exemptions, but their benefits may not be as extensive as those granted to 501(c)(3) nonprofit organizations. While they may be exempt from federal income tax, they often have different requirements regarding donations and deductions for contributors.

Many not-for-profits operate as membership-based organizations, meaning their primary focus is serving their members rather than the general public. Examples include social clubs, recreational leagues, and professional associations that exist to provide benefits and services to their members rather than advancing a broad charitable mission.

Purpose and Common Types of Not-for-Profit Organizations

Not-for-profit organizations often focus on social engagement, shared interests, or professional development rather than providing broad public services. Unlike nonprofits that typically serve the general public, not-for-profits primarily benefit their members or a specific community. They operate in both the public good and private sector across various areas, including:

• Social and Recreational Groups: Clubs, sports teams, and local organizations that unite members for activities and community-building.
• Professional Associations: Groups that support specific industries by providing networking opportunities, education, and industry representation.
• Fraternal Organizations: Societies and community groups that promote social connection, charitable efforts, and mutual support.
• Hobby and Special Interest Clubs: Groups centered around activities like arts, music, gardening, or other shared interests.
• Mutual Benefit Organizations: Organizations that serve their members rather than the general public, such as homeowner associations (HOAs) or cooperative housing groups.

Common types of not-for-profit organizations include:

• Local Sports Clubs: Amateur athletic organizations that use membership fees to maintain facilities and host events.
• Community Theater Groups: Volunteer-run organizations that produce performances for local audiences.
• Hobbyist Groups: Photography clubs, book clubs, and other groups that provide resources and activities for enthusiasts.
• Trade Associations: Professional organizations that support industry members through networking, advocacy, and education.

Not-for-profits play an important role in bringing people together around shared interests and causes. While they do not focus on generating profits, their ability to reinvest surplus funds into their programs ensures long-term sustainability and continued service to their members.

What is a Nonprofit?

A nonprofit organization is a legally recognized entity that operates to support a cause or serve the public rather than generate financial or tax returns only for individuals. These organizations focus on charitable services, education, healthcare, scientific research, and social advocacy. Many qualify for tax-exempt status under federal regulations, allowing them to direct more resources toward their mission.

Definition and Key Attributes

A nonprofit organization operates with a clear purpose that benefits the public or advances a specific cause. Unlike for-profit businesses, nonprofits prioritize service over financial gain.

One defining characteristic of nonprofits is their tax-exempt status under 501(c) classifications if they meet federal and state legal requirements. This allows them to be exempt from federal income tax and, in some cases, state and local taxes. While nonprofits can generate revenue through donations, grants, and service fees, all funds must be reinvested into programs and services rather than distributed as profits to individuals.

Governance is another important aspect of nonprofits. Most are overseen by a board of directors, which ensures financial transparency, compliance with regulations, and alignment with the organization’s mission. Additionally, nonprofits are subject to regulatory oversight, requiring them to follow financial reporting and governance rules to maintain accountability and public trust.

Primary Focus on Public Benefit and Charitable Activities

Unlike not-for-profit organizations, which often exist to serve their members, nonprofits are structured to benefit the public or advance a charitable cause. They operate across various sectors, including:

• Charitable Aid: Organizations providing food, housing, and essential resources to underserved populations.
• Education and Research: Schools, universities, scholarship funds, and scientific research institutions.
• Healthcare and Medical Services: Hospitals, free clinics, and public health initiatives.
• Environmental Conservation: Groups working on sustainability efforts, wildlife protection, and climate awareness.
• Social Justice and Advocacy: Organizations focused on civil rights, human rights, and community development.

Common Types of Nonprofit Organizations

Nonprofits are categorized based on their purpose and how they operate. Some of the most well-known classifications under federal law include:

• 501(c)(3) – Charitable Organizations
  • Includes groups focused on education, religion, science, and public service.
  • Donations made to these organizations may qualify for tax deductions.
  • Examples: American Red Cross, Habitat for Humanity, and community foundations.
• 501(c)(4) – Social Welfare Organizations
  • Focus on advocacy and policy reform.
  • Can participate in lobbying efforts but do not offer tax-deductible donations.
  • Examples: NAACP and AARP.
• 501(c)(6) – Business Leagues and Trade Associations
  • Support industry professionals and businesses rather than the general public.
  • Examples: Chamber of Commerce and National Association of Realtors.
• 501(c)(7) – Social and Recreational Clubs
  • Serve members by offering social, recreational, or hobby-based activities.
  • Examples: Country clubs and community-based hobby groups.

Overall, nonprofits play a significant role in addressing social issues, supporting communities, and driving meaningful change. Their ability to operate effectively depends on strong governance, financial accountability, and a commitment to their mission.ion’s credibility by demonstrating a clear governance structure, making it more trustworthy and appealing to key groups like the IRS, government agencies, corporations, other nonprofits, and potential funders. 

Choosing the Right Structure for Your Organization

It can be a challenge to choose the proper structure for your organization. Start by looking at your purpose, funding model, tax considerations, compliance requirements, and long-term goals. Understanding these factors will help determine whether a nonprofit or not-for-profit model is the best fit. Here’s a closer look:

Purpose and Mission

Nonprofit organizations are designed to serve the public by providing charitable, educational, religious, scientific, or other social welfare organizations and programs. A nonprofit structure may be the most suitable option if you want to create a charity, school, medical organization, or advocacy group that benefits a broad audience.

Not-for-profits primarily exist to serve a specific membership rather than the general public. Social clubs, trade associations, or recreational groups typically fall into this category, focusing on member engagement and conducting fundraising activities for for-profit businesses rather than public service.

• Nonprofit is a Good Fit If…: Your organization’s mission centers on public benefits, such as offering health services, funding research, or advocating for social change.
• Not-For-Profit is a Good Fit If…: Your focus is on creating a group that serves a defined membership rather than the wider community.

Funding and Revenue Generation

Nonprofit organizations have greater access to diverse funding sources, allowing them to sustain and expand their programs. They can secure financial support through various means, including:

• Contributions from Individuals and Businesses: Donations from supporters and corporate sponsorships help fund operations and initiatives.
• Grants from Government Agencies and Foundations: Many nonprofits qualify for grants that provide funding for specific projects or general operations.
• Fundraising Events and Sponsorships: Hosting events, charity drives, and securing sponsorships generate additional revenue while increasing public engagement.

These funding opportunities enable nonprofits to invest in their mission, expand services, and maintain financial stability over time.

On the other hand, not-for-profits primarily rely on membership dues, event revenue, and smaller sponsorships. They typically don’t qualify for the same level of funding from grants or tax-deductible contributions.

• Nonprofit is a Good Fit If…: Your organization will depend on outside funding, such as donations, government grants, and fundraising efforts.
• Not-For-Profit is a Good Fit If…: Your group will be sustained through member contributions and event proceeds.

Tax Exemption and Legal Benefits

Nonprofits that qualify under federal regulations, such as recreational organizations and 501(c)(3) organizations, often receive significant tax advantages. These include exemption from federal income tax and the ability to accept tax-deductible contributions from donors.

Not-for-profits may qualify for limited tax exemptions, such as under 501(c)(7) for social and recreational groups and social clubs. Still, they don’t receive the same tax benefits as nonprofits serving the public interest.

• Nonprofit is a Good Fit If…: Maximizing tax-exempt benefits and attracting tax-deductible contributions is a priority.
• Not-For-Profit is a Good Fit If…: Your organization’s funding model doesn’t depend on tax-deductible donations and only requires minimal tax exemptions.

Compliance and Reporting Requirements

Nonprofit organizations are subject to strict compliance and reporting obligations to maintain their tax-exempt status and ensure financial transparency. These requirements help protect public trust and confirm that the organization operates in alignment with its mission. Nonprofits must:

• Submit Annual IRS Form 990: This document provides detailed financial information, including revenue, expenses, executive compensation, and program activities. Filing Form 990 is essential for maintaining tax-exempt status and demonstrating accountability to donors and regulatory bodies.
• Register With State Agencies: Many states require nonprofits to register for charitable solicitation permits, corporate filings, and periodic financial disclosures. Compliance with state regulations ensures that nonprofits can legally fundraise and operate within their jurisdiction.
• Provide Financial Transparency and Governance Oversight: Nonprofits must maintain accurate records, conduct independent audits (if required), and follow governance best practices, such as board oversight and conflict-of-interest policies.

By contrast, not-for-profit organizations generally have fewer compliance requirements, particularly if they do not apply for formal tax-exempt status. In many cases, they are not required to file IRS Form 990 or disclose financial details to the same extent as nonprofits. However, if a not-for-profit organization owns property, it may still need to comply with local property tax regulations and other applicable state requirements.

• Nonprofit is a Good Fit If…: Your organization is prepared for ongoing financial reporting and government oversight.
• Not-For-Profit is a Good Fit If…: A simpler structure with fewer compliance requirements is preferable.

Longevity and Growth Plans

Nonprofits are designed for long-term growth and financial sustainability, making them a strong choice for organizations that aim to expand services, secure large-scale funding, and establish lasting community impact. The nonprofit model supports structured governance, tax-exempt benefits, and access to diverse funding sources, all of which contribute to long-term success.

Not-for-profits, on the other hand, tend to be smaller and more flexible, often focusing on short-term or member-driven initiatives. While this structure allows for agility and adaptability, it may not support large-scale growth or sustained funding efforts in the same way as a nonprofit.

• Not-For-Profit is a Good Fit If…: Your focus is on a smaller, member-based organization with limited expansion plans.
• Nonprofit is a Good Fit If…: Your goal is to create a lasting organization with growth potential and ongoing community impact.

How Chisholm Law Can Help

Setting up and managing a legally compliant organization requires careful planning. At Chisholm Law, we provide guidance on entity formation, tax-exempt status, and governance to help organizations stay in good standing.

We assist with drafting and filing articles of incorporation, structuring organizations under 501(c)(3), 501(c)(4), or 501(c)(7) classifications, and preparing IRS Form 1023 or Form 1024 for tax-exempt status. Maintaining compliance is equally important, which is why we help with federal and state tax-exemption applications, IRS Form 990 filings, and strategies to avoid unrelated business income tax (UBIT) penalties.

For organizations involved in fundraising, we ensure compliance with charitable registration laws, donor restrictions, and grant funding requirements, as well as clarify legal limits on political activities and lobbying. Strong governance is key to long-term success, so we also assist in drafting bylaws and conflict-of-interest policies, defining board responsibilities, and implementing record-keeping and financial management systems.

Start Your Non-For-Profit Org Today

Choosing between a not-for-profit and a nonprofit structure requires careful consideration of your organization’s mission, funding sources, tax implications, and long-term goals. While both types of organizations operate without distributing profits to individuals, their legal status, financial opportunities, and compliance requirements differ significantly.

If your goal is to establish an organization that serves the public, qualifies for tax-exempt donations, and has access to large-scale funding opportunities, a nonprofit may be the best option. On the other hand, if your focus is on serving a specific group through a membership-based model with fewer regulatory requirements, a not-for-profit could be the right fit.

Regardless of which structure you choose, ensuring proper legal compliance from the start is essential. Chisholm Law provides comprehensive legal guidance on entity formation, tax-exempt status, governance, and compliance to help organizations build a strong foundation. Contact us today to discuss your goals and take the next steps in forming a legally sound and sustainable organization.

*Past results do not determine future outcomes