Non-Profit vs Not for Profit – Difference and Comparison

What is Non-Profit Organization?

Ideally, the main aim of a business is to make a profit. However, some businesses are set up with the main goal of offering services for the benefit of a community. Non-profit organizations are an example of such businesses.

A non-profit organization is a legal entity that is established to benefit society. It is required by law that this organization commits any surplus revenue to its main purpose and not to private parties.

Non-profit organizations raise funds through donations, corporate sponsorships, government funding, and investments. Therefore, they must publicize all of their operations and financial status for accountability.

Non-profits are mostly exempted from tax with requirements varying from country to country.

It is commonly thought that non-profits are operated mainly by volunteers. While this may be true, a non-profit can have paid staff at the management level. The paid staff oversees the critical operations of the entity and manages the volunteers.

Non-profits can be set up for various educational, research, scientific, religious, and charitable purposes. An example of a non-profit organization is the Bill and Melinda Gates Foundation, founded in the year 2000.

 It is reported to be the second-largest non-profit organization in the world. Its main aim is to fight poverty, disease, and inequality globally.

What is Not-for-Profit Organization?

Much like a non-profit organization, a not-for-profit organization does not distribute its revenue to its owners. Instead, all the earned money is directed toward meeting the organization’s objectives.

Not-for-profits can raise their money through sales, membership fees, and investments. However, any revenue that is generated cannot be distributed among the owners.

Not-for-profit organizations have to apply for tax exemption. Once this organization is granted a tax-exempt status, it can enjoy tax relief from sales tax and property tax.

Not-for-profits can also be founded by anyone. All a person needs is to find a problem in their community, create a business plan and register the business.

Because not-for-profits generally do not accept donations, they are not subject to strict accounting principles. They do not need to publicize their financial status or follow the strict guidelines from the GAAP (Generally Acceptable Accounting Principles).

Not-for-profit organizations operate on a smaller scale in comparison to non-profits. Also, they cannot acquire a separate legal entity status as in the case of non-profits.

An example of a not-for-profit organization is a recreational golf club. It generates revenue from membership fees and the selling of its merchandise. All the revenues are however channeled toward meeting the organization’s objectives.

Difference Between Non-Profit and Not-for-Profit Organization

  1. Non-profits operate on a larger scale whereas not-for-profits operate on a smaller scale.
  2. Non-profits can acquire separate legal entity status but not-for-profits cannot get one.
  3. Stringent accounting measures are put in place for non-profit organizations. Not-for-profit organizations on the other hand do not have strict rules applied. For example. The latter does not have to publicize financial records, but the former has to make their financial status and activities public.
  4. Non-profits are set explicitly to benefit the public but not-for-profits are set to benefit the organization’s objectives.
  5. Non-profit organizations can have both employees and volunteers but not-for-profit organizations have volunteers only and hence do not hire permanent employees.

Comparison Between Non-Profit and Not-for-Profit Organization

Parameter of Comparisonnon-profitNot-for-profit
scaleOperate on large-scaleOperate on mall-scale
Legal statusCan get separate legal entity statusCannot get separate legal entity status
Accounting rulesFinancial reports must be made publicFinancial reports do not have to be public
AimBenefit the public goodBenefit the organization and its members
EmployeesCan have both paid employees and volunteersOnly have volunteers

References

  1. https://www.elgaronline.com/abstract/edcoll/9781788975797/9781788975797.00048.xml
  2. https://www.nber.org/system/files/chapters/c9964/c9964.pdf