In order to answer this question, let’s define what a nonprofit organization actually is.
The term is, unfortunately, pretty misleading. It definitely doesn’t mean that the organization is unable to earn a profit. On the contrary, many nonprofit businesses enjoy large and fruitful profits (see: IKEA). And besides, how would a company function without making any sort of profit? Well, it wouldn’t.
The easiest way to define a nonprofit (or non profit, or non-profit, whichever you prefer) is to first define its counterpart: the for-profit organization (see: Target). The purpose of a for-profit is to generate profits for those who own it-the stockholders. So, after all is said and balanced, including employee payroll, the profits go to them and not into the business itself. So what it comes down to, is who profits at the ownership level.
Both types of organizations are able to earn profits at the entity level, but only for-profits can do so at the ownership level. In fact, nonprofits very rarely have owners (they usually have a Board of Directors, or Board of Trustees), and they are not permitted to pass any profits to those who control them. To keep it in super simple terms, as a nonprofit board member, if you touch the money, you can’t pay yourself.
Nonprofit organizations are required to use their profits for exempt purposes only, which according to the IRS, are as follows:
The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
Okay, so what’s the difference between a nonprofit, and a not-for-profit?
People often use these two terms interchangeably, but they are, in fact, different. The official term you’ll want to use for your organization is nonprofit. The other term is reserved for activities that you do outside of the business or profit scope. For instance, binge-watching Netflix, dressing up your cat, painting, or reading are all not-for-profit activities. Ready for the kicker? If the IRS determines your nonprofit has gone too long without making a profit, it will reclassify you as a not-for-profit activity, and you won’t be able to deduct expenses.
Always remember that we are a document preparation agency, and can therefore not offer legal advice. Nevertheless, we hope you’ve gained a bit of insight into your nonprofit journey. Feel welcome to reach out to us with any questions or comments you may have.