Nonprofit, Not-for-earnings & For-earnings: What’s the Difference?

To the uninitiated, the terms “nonprofit” and “not for earnings” may seem identical—in truth, they’re often used interchangeably. Throw in the term “for earnings” and things can get mighty confusing. 

Despite their similar names, however, all three are distinct types of organizations with different levy treatments, governance rules, and missions. Here’s how to untangle these terms and choose the correct organizational structure for your enterprise.

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What is a nonprofit? 

A nonprofit is an organization designed to advance a social factor or provide a community advantage—things like education, charity, research, or animal welfare. A nonprofit can’t make profits to distribute with owners or investors. Instead, any turnover the nonprofit generates goes correct back into financing its mission.

If you run a nonprofit, you get levy benefits like exemptions from turnover levy, property levy, and sometimes sales levy. In trade, you require to remain transparent about how your money is spent. 

Nonprofits can receive many forms, from colleges and research institutions to charities and houses of worship. In the US, they’re often called 501(c)(3) organizations, referring to the levy code that governs their position. While they operate like businesses in many ways—raising money and managing budgets, for example—they exist to serve the community excellent, not shareholders.

What is a not for earnings? 

“Not for earnings” is a broad term for organizations that do not generate earnings for their owners. All money generated by a not-for-earnings organization must be reinvested back into running it.

Unlike nonprofits, not-for-earnings organizations are not required to operate specifically for the advantage of the community or the advancement of a social factor. A not for earnings can simply operate to serve the goals or special interests of its members. For example, a recreational sports club can operate as a not for earnings.

Like nonprofits, not-for-earnings organizations must apply to qualify for levy-exempt position with the Internal turnover Service (IRS). However, money donated to not-for-earnings organizations is not levy deductible.

What is a for-earnings business? 

A for-earnings business exists to make money. That’s its main objective, whether it’s selling products online, providing services, or building solutions people require. The profits it earns don’t just leave back into the business. They can also leave to owners, shareholders, or investors as rewards for their resource and attempt.

Most ecommerce businesses fall into this category. Opening an online store, selling wholesale, and selling on marketplaces are all considered for-earnings ventures.

For-earnings businesses pay taxes on their profits and are owned by individuals or shareholders who advantage from those profits. The owners can receive profits as personal turnover or reinvest them into the business for growth. 

Nonprofit vs. not-for-earnings vs. for-earnings businesses

Nonprofits and not-for-earnings organizations both enjoy levy-exempt position from the IRS. However, they have several key differences in scope and how each serves the broader throng. We’ll also contrast them to for-earnings businesses here so you can view how they differ:

Purpose and mission

How they’re different

The biggest difference between all three comes down to the mission. 

A nonprofit’s mission is to focus entirely on advancing a social factor. They’re built to serve the community excellent and can’t distribute profits to owners or shareholders.

By contrast, for-earnings companies are driven by the objective of making money for their owners and shareholders. While they may serve a throng or propose a valuable service, their ultimate aim is to generate a earnings.

Not-for-earnings organizations fall somewhere in the middle. They can be formed and run solely to meet the goals of their members or owners (as in, they don’t require to advance a social factor), but the profits must be fed back into the business. 

How they’re similar 

All three types of organizations aim to propose worth—whether that involves providing a service, creating a product, or serving a throng. They can’t exist without providing worth to a sufficient number of people.

obligation

How they’re different 

Interestingly, a nonprofit organization can operate like a traditional C corporation, where the organization is a divide legal entity from the owner. By contrast, not-for-earnings organizations are similar to general partnerships in that they enjoy no legal separation from the members involved. However, some states, like recent York and Florida, allow not-for-earnings organizations to incorporate as their own legal entities while retaining some state levy exemptions.

In for-earnings businesses, the owners or shareholders are also protected from personal obligation, typically through structures like LLCs or corporations. However, if the business incurs obligation or legal issues, the organization itself is responsible, not the person owners—unless they’ve personally guaranteed a financing or are involved in illegal activities.

How they’re similar 

All types of businesses—whether nonprofit, not for earnings, or for earnings—carry some level of obligation. This means that if the organization gets into legal trouble, it can be held responsible for debts or damages. However, the owners or leaders of these organizations typically aren’t personally liable for the organization’s debts (depending on the structure, like an LLC or corporation), meaning their personal assets are usually protected.

levy treatment 

How they’re different

Nonprofits enjoy special levy-exempt position, meaning they don’t have to pay federal turnover taxes on turnover related to their charitable mission. They also may be exempt from some state turnover taxes, property taxes, and even sales taxes, depending on where they’re located.

Like nonprofit organizations, not-for-profits don’t distribute profits to owners, but they aren’t necessarily levy exempt. They might still have to pay turnover taxes, depending on how they’re structured and what benevolent of activities they’re engaged in.

For profits don’t have the luxury of levy-exempt position. They must pay taxes on the money they make. This includes federal turnover taxes, state turnover taxes, and even sales or property taxes, depending on the type of business and location.

How they’re similar 

All organizations—nonprofits, not for profits, and for profits—are required to pay taxes in some form, but the specifics vary based on their structure and purpose. Both nonprofits and not-for-earnings organizations are exempted from sure kinds of taxation by the IRS.

Revenues

How they’re different

Nonprofit organizations run to maximize revenues for the causes they back. Not-for-earnings organizations do not run with the objective of earning turnover, and any money earned has to leave back into the organization itself. 

For-earnings businesses operate solely with the objective of generating turnover, which they can then distribute among owners and shareholders or invest back into the business. 

How they’re similar 

For all three types of organizations, bringing in turnover is essential to staying in business and covering costs. Plus, they all typically generate turnover by offering something of worth. 

Employees

How they’re different

While nonprofits may have paid staff (often including a president or CEO), not-for-earnings organizations are often run by volunteers. Salaries in nonprofits may be lower than in for-earnings organizations because the focus is on using resources for the community excellent.

For profits have employees just like nonprofits and not for profits, but the main difference is their purpose is to turn a earnings for owners and shareholders. They often can propose higher salaries, bonuses, and stake options to attract and retain talent. 

How they’re similar 

All organizations depend on employees (or, more accurately, people), but nonprofits and not for profits may focus more on mission-driven work with potentially lower pay, while for profits often have more budgetary flexibility and can propose higher compensation.

Switching organizational types

Some organizations and businesses may initially form as a nonprofit or not-for-earnings organization, but later decide to convert to a for-earnings assignment, or vice versa. While the procedure can be challenging, it’s feasible to convert from one type of business entity to another.

Converting from nonprofit or not-for-earnings to for-earnings

To convert from a levy-exempt organization like a nonprofit or not-for-earnings to a for-earnings assignment, you will require to notify the IRS in writing via a statement of nonprofit conversion. 

The statement must include:

• The rationale for your conversion
• A certified copy of a asset sale schedule, which explains what will happen to the nonprofit’s assets upon conversion (Are you rolling assets into the for-earnings assignment? Make sure to incorporate them into your approximate of the organization’s fair trade worth.)
• A list of all resource recipients and the assets to be distributed
• An approximate of the fair trade worth of the organization

Converting from for-earnings to nonprofit

Converting a for-earnings assignment into a nonprofit is a bit more complicated than the other way around. The IRS makes this procedure more complicated to discourage for-earnings businesses from converting simply to avoid paying taxes. 

To execute the conversion, you will be required to do the following:

• Write a mission statement explaining how you schedule to serve population as a nonprofit, including charitable purposes.
• Write and adopt bylaws through a vote of an appointed board of directors. You may choose to adjust your existing corporate bylaws to reflect your recent nonprofit mission, or completely rewrite them. You may also choose to roll existing board members into the recent nonprofit or appoint recent ones.
• File articles of incorporation with the state secretary of state office.
• pursue sure state-specific rules for conversion. In recent York, for example, you will require to make a divide nonprofit organization and then merge it with your for-earnings assignment into a single recent nonprofit organization.

What model should you choose for your business?

Choosing whether to commence a nonprofit, for-earnings, or not-for-earnings organization completely depends on your goals, values, and what you desire to achieve. Luckily, you can commence any of these businesses with little to no money. 

If your primary aim is to make a positive impact through education, charity, or another social factor, a nonprofit might be the way to leave. Nonprofits are designed to serve the community excellent and they propose levy benefits, but they also arrive with stricter rules about how profits are used and what you can pay yourself.

If you desire to construct something that benefits a specific throng or throng without the heavy, often restrictive requirements of a nonprofit, a not-for-earnings might be a excellent fit. Not-for-earnings organizations don’t distribute profits to owners, but they have more flexibility in how they operate. 

Alternatively, if your objective is to make a earnings and commence a business that can generate turnover for you (like an online store) a for-earnings business is a no-brainer. This model offers the most liberty when it comes to managing finances and compensation, but it does arrive with the added responsibility of paying taxes on your profits. 

Once you’ve decided which model works best for you, don’t overlook to register your business, get any essential business licenses, choose a name for your business, and make a roadmap.