While we often use the terms nonprofit and not for profit terms interchangeably, technically they represent two different business entity types.
From a tax and financial standpoint, both of these are very different from a for-profit business.
Knowing the difference between these three entity types is essential when deciding what designation to choose for your own for-profit, nonprofit, or not-for-profit entity.
The main distinguishing factors
There are several distinguishing factors between these business types.
The main differences include:
- Not-for-profit organizations do not earn profits for the owners. The money that a not for profit takes in is exclusively for promoting the organization’s mission or objectives, and to keep the business running. Not for profits typically do pay federal income taxes on donations and other funds or income. This type of business may be required to pay payroll taxes, state and local income taxes as well as business and property taxes. These entities are typically formed for religious, public safety, charitable, literary, artistic, scientific, or educational purposes. Habitat for Humanity, Unicef, the Red Cross are three well-known examples of not-for-profit entities. Any charitable, scientific, religious, literary would fall under 501(c) (3). A social welfare organization would be a 501(c)(4), a trade association is a 501(c)(6) and a social club is a 501(c)(7).
- Nonprofits are tax-exempt businesses. They do not pay taxes including sales tax and property taxes. They do however pay payroll taxes. A nonprofit may include a charity or state-run public university. A nonprofit distributes the accrued income to the group’s members, directors, or officers. The United Way and the Salvation Army are two examples of nonprofits. There are over 29 nonprofit designations.
- The difference between a for-profit business and both a not-for-profit and a nonprofit business is that a for-profit business distributes profits to its shareholders. Bound by legal and ethical restrictions, nonprofits and not for profits are forbidden to do so.
The tax implications of any business formation can have a profound impact on the success or failure of a venture.
The experienced business law attorneys at Bashian P.C. can answer your more specific questions, and offer vital guidance, in the creation of your business.