Charitable organizations are sometimes referred to as “nonprofits” or “not for profit organizations." Many times, people use these terms interchangeably as if they both mean the same thing. To be sure, there are some similarities between the two types of organizations. However, there are also several differences, including the process of acquiring tax-exempt status, banking practices and procedures, membership and the use of the funds that they raise.
While there are several similarities between the two types of organizations, there can be some difference between a nonprofit and a not for profit organization, regarding membership, banking and tax status.
Both not-for-profits and nonprofit organizations are generally aimed towards a similar purpose: to raise awareness or funds for a specific cause. This cause is typically charitable but can vary widely. For example, the cause could be to alleviate childhood hunger, end homelessness, protect animal welfare or provide medical care.
Additionally, both types of organizations can qualify for tax-exempt status from the Internal Revenue Service. However, the process for qualification can differ.
Finally, most nonprofits and not-for-profits do make money. However, they must reinvest those funds back into the administration or management of the organization, or spend it to advance their core purpose.
A not-for-profit cannot retain any profits. The same is true for a nonprofit organization or business. They must reinvest any profit they do make by spending more money in pursuit of their charitable purpose. This is true of an income generated by the organization, whether it comes from an individual donation or a concerted fundraising drive.
For example, if a nonprofit’s purpose is to alleviate poverty or assist with housing, it may offer financial assistance in the form of cash to victims of a natural disaster.
On the other hand, a not-for-profit may be allowed to reinvest funds by distributing them to its members. For example, a not-for-profit may pay trip expenses for a member who participates in fundraising.
Membership in the two types of organizations can differ as well. Nonprofits, for example, can be volunteers, in which case they do not receive any compensation for their efforts. However, nonprofits may also employ a staff. If a nonprofit does employ staff members, those employees earn salaries that are funded outside the organization’s fundraising efforts. Volunteers, by definition, do not benefit from the organization’s income.
A not-for-profit may have members who benefit in some way from the organization’s income. For example, a child who participates in fundraising efforts, such as selling candy, might benefit from having the organization pay his way to camp.
Organizations that are charitable in purpose and restricted in earning profits have to watch their pennies carefully. As a result, most nonprofits and not-for-profits look for banking services that do not charge them any fees.
Sometimes, banks will distinguish nonprofits from not-for-profits and have different rules or procedures for each type. Banks usually look carefully at the nature of the organization itself. Specifically, banks and other institutions and businesses create a distinction between organizations that have an independent existence separate and apart from its members and organizations that don’t.
A nonprofit typically receives a charter at a state or national level and is generally treated as if it has a separate legal existence from its members. The classic example of this type of organization is a church. However, a not-for-profit does not have a separate legal existence from its members. A social club is an example of a not-for-profit.
The IRS can grant tax-exempt status to both nonprofits and not-for-profits, assuming the organization meets the tax code’s requirements. Public charities (nonprofits) are held to the requirements of 501(c)(3) of the Tax Code. These requirements state that the qualifying organization must be organized and operated exclusively for one of several purposes, including religious, charitable and educational purposes. Businesses that qualify under this law do not pay taxes on the money that they raise.
By way of contrast, a not-for-profit, for example, a social or recreational club, must meet 501(c)(7) requirements, which state that it must be organized for pleasure, recreation and other similar non-profitable purposes.
In either case, once this status has been granted by the IRS, donations and gifts to the organization from others are tax-deductible to the person donating, and exempt from income taxes for the organization itself.