The Nonprofit FAQ

Is there a difference between 'nonprofit' and 'not-for-profit'?
In a message to NONPROFIT on 5/3/98, Larry Holmes
wrote:


What is the difference between a nonprofit and a not-for-profit?

Elliott I. Alvarado replied:

Several replies to this query are correct in the notion that there is no perceived difference between the two terms. Legal statutes even refer to the two terms as being synonymous. But the *practical* legal definition (as established by the wise and beneficient people at the IRS) does make a distinction.

"Not-for-profit" refers to an activity, for example, a hobby (like fishing).

"Nonprofit" refers to an organization established for purposes other than profit-making. Note here that nonprofit does not necessarily mean "charitable."

For example, a "nonprofit" organization can be an association of people who like fishing (though the activity does not have to be not-for-profit).

Legal folk and academicians tend to use the "nonprofit" term, whilst fund-raisers (such as the National Society of Fund Raising Executives) tend to use the "not-for-profit" term. Generally, this does not cause problems since everyone within the sector knows what everyone else means.

There is some feeling that "not-for-profit" more appropriately describes the organizations in this sector to the general public. IMHO, I feel that the use of this term in this manner introduces a layer of complexity on top of the "legal" defintion that only serves to confuse the general public. For this reason, I prefer to use the "nonprofit" term when I speak of organizations that operate without purpose of profit.

Also note that the use of the term "non-profit" with the dash in between the letters. There is no implied or distinctive definition attached to this word (as far as I know). I have noticed the use of this term to introduce concepts
or explain technical aspects of organization when an audience is *not* familiar with nonprofit operations.

Everyone has a preference. But not everyone can cite a reference...

My reference is the Great Wizard of Legal Stuff: Bruce Hopkins, author of the Nonprofit Legal Dictionary and other works.

(NOTE: Hopkins' Dictionary is out of print. You can order his http://www.amazon.com/dp/0470397934/?tag=internetnonprofi">Starting and Managing a Nonprofit Organization from Amazon.Com using this link. Your purchase will generate a small royalty which will be used to maintain this site. -- Ed. 2/7/99)

This brief note from the http://www.examiner.com/x-9354-Seattle-Unemployment-Examiner~y2009m8d17-Is-your-business-a-hobby--IRS-tells-all">San Francisco Examiner on August 17, 2009,, though written from the point of view of a hobbyist concerned about taxes, illustrates another common use of the term "not-for-profit". —Ed.

Here are eight questions that will help determine if your activity is a hobby or a business.

  1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
  2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
  3. Do you depend on income from the activity? If so, your activity is likely considered a business.
  4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
  5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
  6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
  7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
  8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

    If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

    If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

    More information about not-for-profit activities is available in http://www.irs.gov/pub/irs-pdf/p535.pdf"> Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).

    Roger Hughes wrote in ARNOVA-L in January of 1999:

    It's interesting to read people's take on the "corruptible sector", the intrustion of for-profit groups into traditional nonprofit "work," and related matters. For my taste, we make too much of distinctions between nonprofits and for-profits, and were I to venture a guess about some distant future, I would predict that the distinction will eventually become
    operationally, if not legally, meaningless.

    As the CEO of a health "conversion" foundation, I spend a fair
    amount of time talking with my trustees and commununity members about terms like 'accountabiliy,' 'public interest' and the 'law' governing such things. My board wants to know not only what is legally permissible for our organization in carrying out its mission of helping disadvantaged populations access health care and address important public health issues,
    but also what is the "right thing to do" given the circumstances of our genesis from a hospital system to a health public charity. The spurious conflation of the legal with the ethical, which many (but not all) lawyers seem predisposed to gloss with their profession's cynical world view, is often reduced to a sidebar in the more immediate discussion of how we can be most effective in being a "catalyst for community health," a statement of intent that we take seriously. As the person charged with directing this operation on behalf of a community board, I first look at the outcome we want to achieve, and then consider what relationships with other groups
    -- nonprofit and for-profits alike -- might hold promise for the best results. I and others judge these groups on the basis of their track records, their "folklore" in the community and their respective fields, an assessment of both individual and organizational character and, quite frankly, the political and social exigencies of the moment. As it turns out, tax status is not always the defining element.

    No one holds a monopoly on ethics, and certainly not on good
    judgment. It's just as easy to hand out the goodies under the table in a nonprofit as it is in a for-profit, and to wear a sackcloth in either. I once recommended a grant to a nonprofit organization working with disadvantaged inner city youth whose executive director subsequently brought a Jaguar and apparently disappeared off the face of the Earth. I once used a fiscal
    agent organization that used grant funds to hire a private
    contractor in a drug therapy program whose directors were paid obsence fees for zero work, as I found out later. It wasn't the tax status that tripped me up, but poor judgment, lack of credible information, glib talk and the usual quotidian distractions of life. Of course, if that were all there was to
    my odd career as a grant maker, then I wouldn't still be around
    today; suffice it to say that I've learned to worry less about tax and organizational definitions as I've gained more experience in the ambiguity and final irony of human affairs. Basically, I'd do business with the Devil himself if I thought he was in a weak moment where he might actually consider doing some good somewhere.

    Most of the people on the ARNOVA list appear to be academics, and no doubt the preoccupation with categories, regulations and history has some practical as well as theoretical import. But when it's all send and done, some of us prefer to make it up as we go along. I used to have "pure" thoughts about distinctions between nonprofits and for-profits, boards and staff, theory
    and practice, and all sorts of other dualisms, but it's hard to find the energy for that kind of clarity in the fuzzy illogic of practical human affairs. It's possible to do business on both sides of the street at once and prosper. Anyway, that's my experience.

    Richard Flyer added the next day:

    As a former director of a CBO in San Diego, CA I can report that in 1994 we created (as many non-profits are doing in the last several years) a "food cooperative" grocery store in a low-income neighborhood that was a C-Corporation, and wholly owned by the non-profit. I spoke directly with the regional manager of the IRS in Fresno about it at the time and all they cared about was to distinguish the for-profit store part (pay tax on income) and the non-profit.

    The non-profit controlled 100% of the shares of the for-profit. The idea was to vest shares and thus actuall ownership of the store to the employees through time as revenues increased.

    We did this as a way to increase community ownership in an area that was historically dominated by "outside" (non-resident) ownership.

    GOING FURTHER

    There are other models that totally break down any distinction
    between non-profit and for profit.

    The cooperative ownership model. Pioneered in Europe in the 19th century it is still alive and going strong through thousands of worker-owned and consumer-owned cooperatives like credit unions. This form of business has a social mission (to benefit the members) and necessarily a business consciousness because they need to survive economically.

    The social investment movement and the social business movement.
    The U.S. organization World Share (and its many SHARE affiliates) have explored harmonizing the social mission aspects and the business aspects.

    The fact of the separation of "non-profit" and "for-profit" sectors, in my opinion, has to do with the schizophrenic consciousness of people who are "just trying to make money" and those "who want to do good works."

    As a former director of another organization in the late 90's, the San Diego Food Bank, I realized that the best thing we could do for hungry people (beyond giving them emergency food) was to find ways to help them to get money so that they could buy food without having to go to a food distribution organization---basically, I wanted to put the food bank out
    of "business." The way that I choose to do this was to help people start microenterprises and restructure our organization to be "entrepreneurial", to become an employer and a job training organization.

    Back to the mental split. Until there are leaders of organizations/business who make the conscious leap and can reconcile and harmonize these two areas, there will not be any innovations that can be profound enough to reverse the polarazation between the rich and poor on the planet.

    We need to bring a "spiritual" (read: loving, sharing, compassionate, etc.) consciousness to business and at the same time bring an "entrepreneurial" conscioussness to social organizatioins--- at some time in the future the distinctions will vanish--- and humamity will have evolved an entirely new form of organization that will finally put an end to local/global poverty so that we can get around to building
    a truly global civilization.




    ARNOVA-L is sponsored by the Association for Research on
    Nonprofit Organizations and Voluntary Action --
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    Posted with permission of the authors, 1/16/99 -- PB





    Posted 5/3/98, revised 2/7/99, 1/20/00 -- PB