The terms “nonprofit” and “not-for-profit” are often used interchangeably. Neither one makes a profit. Both are regulated differently from companies that do make a profit, and both are tax exempt. Despite the similarities, there are subtle differences. Nonprofits and not-for-profits use their incomes differently. Their memberships are different. From a banking perspective, there are differences. From a tax perspective, although both are tax exempt, the IRS has different requirements for granting tax exempt status.
Use of Income
Nonprofits and not-for-profits are not allowed to make a profit, but they might generate income. Any income generated by a nonprofit must be returned to the organization to accomplish the goals for which it was established. For example, a nonprofit with a goal of helping people in need may offer financial assistance to victims of a natural disaster. Any income generated by a not-for-profit may be distributed to its members. For example, a not-for-profit may pay trip expenses for a member who participates in fund raising.
The difference between a nonprofit and a not-for-profit can be in the organization’s membership. A member of a nonprofit could be an employee or volunteer, neither of whom benefits from the organization’s income. Employees of a nonprofit earn salaries that do not depend on the organization’s fund raising efforts. Volunteers, by definition, do not benefit from the organization’s income. A not-for-profit may have members who do benefit from the organization’s income. For example, a child who participates in fund raising efforts, such as selling candy, might benefit by having the organization pay his way to camp.
For the purpose of opening accounts that do not incur a service charge, a bank may distinguish between nonprofits and not-for-profits. From a banking perspective, whether an organization has a legal existence separate from its membership is what determines the difference. A nonprofit typically receives a charter at a state or national level, so it has a separate legal existence from its members. A church is an example of a nonprofit. 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.
IRS Publication 557, “Tax-Exempt Status for Your Organization,” indicates that both nonprofits and not-for-profits are tax exempt as long as they meet the requirements of the tax code for their type of organization. A public charity - a nonprofit - must meet 501(c)(3) requirements, which state that it must be organized and operated exclusively for one of several purposes, including religious, charitable and educational purposes. A social or recreation club - a not-for-profit - must meet 501(c)(7) requirements, which state that it must be organized for pleasure, recreation and other similar non-profitable purposes.
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