We are asked sometimes about the difference between the terms “charity,” “nonprofit,” non-profit”, and “not-for-profit.” This is a very good question, as many people use the terms interchangeably and incorrectly. So, here’s a brief explanation of terms. The answer has to do with state and federal law, and who is speaking.
The easiest distinction to address is that there is no difference between “nonprofit” and “non-profit” that we have been able to identify in our research and practice. Some US state statutes may use one term rather than the other, but they both mean the same thing. Therefore, we’ll standardize our further discussion on the spelling “nonprofit.”
Under state law, typical corporations (“for-profits”) issue shares of stock and assign ownership to shareholders, along with ownership rights such as ownership of net revenue (profit). One the other hand, some corporations are formed to serve their members exclusively or the public at large. Such corporations are called “nonprofit” in some states and “not-for-profit” in others. In a few states, both terms are used to define and regulate different types of corporations.
The IRS uses its own naming approach based on federal law and regulation. "Nonprofit" organizations are those which fall within the definitions established in the IRS Code under Section 501(c). There are about twenty-five different types of nonprofit organizations recognized by the IRS. . A brief Wikipedia list may be viewed here. Types of nonprofits include chambers of commerce, labor unions, country clubs, some types of insurance companies, and even some organizations designated as nonprofits by act of Congress.
The most popular type of nonprofit is the 501(c)3, called a “charity” by the IRS. A charity can either be a public charity or a private foundation. All 501(c)3 organizations are assumed to be private foundations unless they can pass the IRS's “public support test.” Qualifying as a public charity makes a 501(c)3 eligible for preferential tax treatment by the IRS not given to private foundations.
The IRS has a specific definition of the term “not-for-profit,” and it has noting to do with nonprofits. As Bruce Hopkins says in his book, , not-for-profit “...refers to an activity that is engaged in without a profit motive (that is, a hobby) where the expenses involved do not qualify for the business deduction.”
According to Google, there are over 3,000 references to "not-for-profit" on the IRS web site, and almost none of them are related to charities and nonprofits. [We say "almost" because we found two uses of the term in IRS Publication 557, dealing with community trusts.]
We like the IRS distinctions because they are national in focus; i.e., they apply to all US organizations rather than changing on a state-by-state basis.
We can often tell a person’s professional or geographic background based on their use of the terms:
not-for-profit – often misused by financial professionals and others with a business or finance background in the US to describe nonprofits of all types. Alternatively, some use the term to describe nonprofits which are not charities, and use the term nonprofit as a synonym for charity. "Not-for-profit" is incorrect terminology to use when speaking of charitable or other nonprofit organizations, except when speaking of state incorporation status in some states.
nonprofit – most common term in the US to describe an organization or corporation formed for the benefit of the public at large or a specific group of members.
charity – in the US, used to describe that subset of nonprofits formed for a "public benefit purpose" under the Internal Revenue Code. This term is often used internationally to describe charitable organizations (the term “nonprofit” is a US term). [Charities outside the US also may be referred to as “nongovernmental organizations,” or “NGOs,” a term almost never used when referring to US organizations.]
When we set up Google and Yahoo news alerts to track events in the nonprofit world, we used all four terms as keywords. Generally speaking, "nonprofit" stories discuss US nonprofit organizations, almost all being charities. "Not-for-profit"-keyworded stories almost always are written from a financial perspective, often in finance and investment publications. "Charity" stories usually refer to organizations outside the US. It should be noted, however, that more stories about US nonprofits are beginning to use the word "charity" as a descriptor.
It may be a tempest in a teapot to most people, but some place great store by what words are used to describe the organizations and causes they support, are affiliated with, are employed by, or seek to regulate.
There has been a move in the past 10-20 years or more to find a new term for nonprofits and/or charities that is more positive, less needy-sounding, and which defines the nonprofit sector by what it is rather than by what it is not. The problem with most of these efforts is that they use terms that are inexact or even misleading. Another problem is that the existing terms are well-settled in law and everyday usage, so the justification for replacement or successor terms will need to be compelling enough to inspire courts and legislators as well as academics, practitioners, and the general public.
Nonprofit board governance is indispensable to nonprofit success. From board recruitment and selection to roles, responsibilities, and regulatory requirements, we assist leaders to maximize their board's value and success, both as individual members and collectively.
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