What Does Not For Profit Mean?

Robinhood Learn
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
Definition:

Not for profit means that an organization does not make any profit and that all its earnings and donations are reinvested toward its upkeep and goals.

🤔 Understanding not for profit organizations

Not for profit is a term typically used to describe charitable organizations or other enterprises that work for the public benefit. Unlike a for-profit company, which has turning a profit as one of its primary goals, a not for profit organization, aka a nonprofit, does not profit from its efforts — Its primary goal is to further its cause. Instead, all earnings are used to meet the organization’s objectives and to keep the organization running. In the United States, nonprofits are awarded tax-exempt status by the Internal Revenue Service (IRS) under several sections of the Internal Revenue Code, such as section 501(c)(3). That means they are exempt from most taxes, like property and income taxes, which helps them reduce their financial burdens and more easily achieve their charitable goals.

Example

UNICEF is a not for profit organization that works toward improving the lives of children around the world. It does not make a profit. Instead, it uses all its earnings to try to reach its goals and keep the organization running. UNICEF has 501(c)(3) status and does not pay many of the taxes that similar for-profit entities would.

Takeaway

Not for profits are kind of like volunteers...

They give up making money in an effort to help others. As long as they’re working toward the greater good, they’re happy.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.
Sign up for Robinhood
Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

Tell me more…

What does not for profit mean?

Not for profit indicates that an organization does not aim to turn a profit. But don’t get confused — That’s not the same thing as not being profitable or being unprofitable. Some companies simply don’t perform very well and fail to make a profit despite their best efforts. Those aren’t not for profits — they’re just not profitable.

Not for profit organizations, sometimes referred to as nonprofits, on the other hand, purposely prevent themselves from making any profits from their endeavors. Instead, all the money they receive or otherwise make is either reinvested into the organization’s operations and management or directly put toward a specific cause in the form of donations or other projects. It doesn’t go in investors’ and shareholders’ pockets like a for-profit company’s money does.

Because not for profits use their money to give back to the public and serve a charitable purpose, they receive many tax exemptions. This eases their financial burdens and leaves them with more money to contribute to their cause. Most nonprofits receive tax breaks on both a federal and state level.

What are some examples of not for profit organizations?

Many not for profit organizations are household names. Specific examples of large organizations include:

  • UNICEF gives humanitarian support to children.
  • The Boy Scouts of America runs social and developmental programs for youth.
  • PETA advocates for animal rights.
  • The American Red Cross provides emergency assistance and disaster relief.
  • The Salvation Army seeks to spread a Christian message and runs charity drives.
  • The Mayo Clinic provides medical care, educates, and conducts research.
  • YMCA provides community services.

But this is just the tip of the iceberg. According to the National Center for Charitable Statistics, a project of the Urban Institute (a nonprofit in its own right), there were 1.56 million registered nonprofit organizations (NPOs) in the United States in 2015.

Examples of smaller NPOs include the Leapfrog Group, which rates the quality of hospitals and medical centers, Mercy For Animals, which fights for animal rights, and Professional Women in Construction, which fights for gender diversity in the architecture, construction, and engineering sectors.

How does a not for profit organization work?

Not for profit organizations face many challenges in their day-to-day operations. Because they don’t typically produce tangible, in-demand products, nonprofits primarily rely on the support of volunteers and donors to stay afloat and cover their operating costs.

Typically, nonprofit organizations will run events and fundraisers (often staffed and operated by volunteers) to drum up donations and raise awareness of their causes.

The money the nonprofit receives will generally either go directly to a cause, i.e., purchasing food for the homeless, or indirectly to a cause, i.e., paying for salaried staff, who can advance a nonprofit’s strategy and improve its execution.

In some cases, these two can be mixed. For example: The Boy Scouts of America needs staffers to organize and run events, so salaries and operating costs are going directly toward the advance of its cause — providing programs for youth.

It’s important to note that not for profits do make money, but they don’t make profits. That means that all of a nonprofit’s money is reinvested back into its cause in one way or another.

In contrast, for-profit businesses redistribute profits to shareholders, which then take that money and use it however they please, whether it’s for the betterment of the company or simply to buy a new car.

What are the types of not for profit organizations?

The Internal Revenue Service (IRS) defines 29 different types of not for profit organizations. Of these, several are particularly common:

501(c)(3): Organizations that serve religious, scientific, literary, or other charitable purposes

501(c)(4): Organizations that work toward social betterment

501(c)(5): Trade unions, labor unions, agricultural groups, and horticultural groups

501(c)(6): Chambers of commerce

501(c)(7): Social clubs and other organizations that provide recreational opportunities and group activities

Can a not for profit make a profit?

By definition, not for profit organizations cannot make a profit. However, that does not mean that they can’t make any money.

Rather, all the money that a not for profit makes must go either directly to one of its charitable causes or toward the operation of the organization, i.e., paying employee salaries, office rent, and utilities, etc.

Who can start a not for profit?

Most anyone can start a not for profit, but consider seeking professional advice. For starters you’ll need to:

  1. Choose a name: The name for your organization is up to you, but it must meet state guidelines for not for profit organizations.
  2. Appoint a Board of Directors and draft bylaws: The board and the bylaws will set the rules for the operation of your organization.
  3. Choose a structure: You’ll have to decide how to legally structure your organization as either a trust, association, or corporation.
  4. File the necessary paperwork: You’ll need to file your articles of incorporation, other paperwork, and pay filing fees to your state.
  5. Apply for tax exemption: Once your organization is founded, you’ll need to apply to receive tax-exempt status.
  6. Get any necessary licenses and permits: Not for profit organizations may need specific licenses or permits. Check with your state’s laws to see if you’ll need any.

What are the advantages and disadvantages of not for profit organizations?

Not for profits are widely recognized as having the following advantages:

  • Tax exemption: The IRS exempts not for profit organizations from most taxes. This can save the organization significant amounts of money.
  • Dedicated employees: Not for profits and nonprofits offer valuable services and further important causes. Their employees often tend to be passionate and dedicated to the cause, which can help foster an important sense of purpose and teamwork among them.
  • Eligible for public and private grants: Not for profits can benefit from grants that are specifically aimed at public charities.

However, there are some downsides to not for profit organizations:

  • Public scrutiny: A not for profit organization’s finances must always be viewable by the public, leaving them open to constant scrutiny. Plus, some people may disagree with the organization’s cause, leaving it vulnerable to ideological backlash, too.
  • Highly regulated: Not for profit organizations must keep detailed records to maintain their tax-exempt status. They also need to follow strict regulations regarding their bylaws and structure.

What is the difference between for profit and not for profit?

For-profit organizations typically have one primary goal: to make money for their shareholders. Not for profits, on the other hand, do not seek to turn a profit. Instead, any money they make is reinvested into either its projects or the operation of the organizations.

In a for-profit organization, profits are there to be enjoyed by the shareholders in whatever way they please. They could end up donating them to charity, or they could just as easily buy a virtual reality headset.

The bottom line: For-profits seek to benefit shareholders’ wallets; not for profits seek to benefit society or a group of members.

What is the difference between not for profit and nonprofit?

There is no clear distinction between not for profit and nonprofit organizations. Some say that the difference is that nonprofits benefit society at large, and not for profits benefit only the organization’s members.

However, this is highly contested. For the most part, the terms “not for profit” and “nonprofit” generally can be used interchangeably.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

1174863

Related Articles

You May Also Like

The 3-minute newsletter with fresh takes on the financial news you need to start your day.
The 3-minute newsletter with fresh takes on the financial news you need to start your day.


© 2021 Robinhood. All rights reserved.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. Robinhood U.K. Ltd (RHUK) provides brokerage services in the United Kingdom. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').

1476799