The Difference Between a Non-Profit and a Not-for-Profit Corporation

A question we often get from those starting a business with a philanthropic mission is: what's the difference between a non-profit and a not-for-profit company?

These terms are often used interchangeably but should not necessarily be. There are many similarities between the two types of entities but there are a few key differences.

Let's take a look at the differences between a non-profit corporation and a not-for-profit corporation.

Non-Profit

• Primary mission of raising awareness or funds for a specific cause
• Non-profits generally fall under the IRS 501(c)(3)
• Often have paid employees, not just volunteers
• More common than Not-for-profit companies

Not-for-profit

• Not-for-profits often fall under other IRS exempt categories such as 501(c)(7)
• Often run by volunteers
• Less common than Non-Profits
• Examples include unions, recreational clubs, hospitals, religious groups, welfare societies, and more

Common Misconceptions

Once common misconception about both non-profit and not-for-profit corporations is that they do not make a profit. Both types of corporations may make a profit; however, the difference between these entities and a typical corporation is how those profits are used. Non-profit and Not-for-profit corporation profits must be used eventually (in the next tax year and beyond) for the group's tax-exempt purpose. 

Non-profits and Not-for-profit businesses still have to operate as fiscally responsible businesses and profits are not distributed to directors or members.

How the IRS Views Non-Profits and Not-for-Profits

It's important to keep in mind that the terms non-profit or not-for-profit are both in reference to state law. When discussing how the IRS views these corporations, we use the term "tax-exempt". For more information about federally tax-exempt entities, click here.

For example, if you form a non-profit or not-for-profit with The Incorporators Ltd., you must then apply for an EIN (regardless of whether you will have hired employees or not) and then file the 1023 tax-exemption application with the IRS. 

We hope this has helped clear up some common misconceptions about the use of the terms non-profit or not-for-profit. 

If you have any questions about starting a non-profit or not-for-profit in Delaware, give us a call at 800-223-3928 or contact us here.