Legally speaking, the terms non-profit and not-for-profit are interchangeable in most places. Despite this, each term is typically associated with certain types of activities — generally, not-for-profits serve a relatively small group that's focused on a hobby or sport. Non-profits are typically focused on larger social or political issues, are more well-organized, and often operate as legal entities with a charter and/or governing board that officially represents the group. In some countries, like the US, a non-profit may qualify for tax-exempt status, while a not-for-profit may not.
Similarities
Though both non-profits and not-for-profits may make money, all profit is put back into the organization to keep it running or to otherwise support the organization's mission. Neither type of organization pays stockholders like a for-profit corporation does, and they are often staffed mostly by volunteers. Additionally, in the US, both can be incorporated at the state level, which gives the people who operate the organization legal and financial protection. Sometimes the difference between a non-profit and a not-for-profit comes down to semantics, with an organization preferring to call itself "not-for-profit" to emphasize that any money made goes directly to its cause. The term "non-profit" might be thought to suggest that the organization makes no profit at all, rather than how those profits are used.
Distinctions
Laws on non-profits and not-for-profits vary among jurisdictions and countries, so an organization that might be considered a non-profit in one region may be considered something else in another. In addition, a non-profit organization may be referred to as "not-for-profit" for accounting purposes to distinguish it from a "for-profit" business. Generally speaking, an organization is considered a non-profit if it meets the following criteria:
- it has a charter,
- it is organized for some purpose that serves or betters the community,
- and it does not pay dividends to stockholders.
In most cases, not-for-profits are smaller and based around a specific activity or hobby. They often do not have charters or a formal governing board.
IRS Guidelines
The IRS has set out guidelines for categorizing tax-exempt, non-profit, and not-for-profit organizations in the US. The term "not-for-profit" is mentioned primarily in relation to deducting losses or expenses, and focuses on activities like hobbies, sports, or other recreation that is performed without the intention of earning money. Any activity that brought in more money than it cost in three of the previous five tax years is usually considered "for profit." A knitting club, for example, could be considered a not-for-profit if any money earned from dues or selling knitted products is put back into the club to purchase supplies, pay for rent on a space for the club to meet, or other expenses to keep the club active. The IRS specifically states that organizations set up to support a group of people who practice the same hobby do not qualify as "business leagues," and therefore cannot get tax-exempt status.
A non-profit, on the other hand, can be organized like a business, and is usually expected to earn a profit. That profit, however, cannot be used to the direct benefit of one or more members of the organization; it must go directly toward supporting the mission of the organization. The IRS groups non-profits with charities, religious organizations, and private foundations together under IRC Section 501(c)3 - 6, and with political organizations in Section 527 as those groups which may be considered tax-exempt if they meet certain criteria. A knitting guild, for example, that's set up to educate the public about knitting and to promote the businesses interests of those within the knitting industry could be considered a non-profit.
