Not for Profit: Definition, Activities, and Taxes

Key takeaways
* Not-for-profit organizations do not distribute profits to owners or members; all funds must support the organization’s objectives and operations.
* They can be tax-exempt, but not all are 501(c)(3) charities and not all donations to them are tax-deductible.
* Common activities include fundraising, program delivery, and administrative management; payroll and employee income remain taxable.

What “not-for-profit” means

A not-for-profit organization operates to advance a specific purpose (social, recreational, civic, religious, educational, etc.) rather than to generate profit for owners or shareholders. Any surplus at year-end must be retained by the organization and used to further its mission or cover operating costs. Examples include homeowners associations, private sports clubs, fraternities, and social clubs.

Charitable and organizational purposes

Not-for-profits may pursue a variety of purposes, such as:
* Relieving poverty or providing basic necessities
* Providing education or skill-building programs
* Advancing religion or faith-based activities
* Offering community benefits, civic engagement, or social welfare

Some not-for-profits are charitable in the IRS sense (potentially qualifying under 501(c)(3)); others are social or member-focused and are tax-exempt without qualifying as charities.

Typical activities

Most not-for-profits engage in three broad activity areas:
* Fundraising — events, direct solicitations, major gifts, product sales
* Program operations — services and activities that fulfill the mission
* Administrative management — bookkeeping, staff, compliance, and overhead

Funds raised are primarily used to support programs and cover necessary administrative expenses.

Tax status and implications

• Tax exemption: Many not-for-profits are exempt from certain taxes (e.g., some sales and property taxes), depending on jurisdiction and status.
• Deductibility of donations: Only donations to qualifying charitable organizations (typically 501(c)(3) in the U.S.) are tax-deductible for donors. Donations to member-focused or social not-for-profits often are not deductible.
• Payroll and income taxes: Not-for-profits must withhold and remit payroll taxes for employees; employees and paid directors must report and pay income tax on compensation received.
• Commercial activities: Income from unrelated business activities may be taxable even for tax-exempt organizations.

For-profit vs. not-for-profit

Similarities:
* Both can have paid staff, boards of directors, and professional management practices.

Differences:
* For-profits distribute net earnings to owners or shareholders; not-for-profits retain surpluses to advance the mission.
* For-profits operate across a broad range of commercial activities; not-for-profits must operate within their stated purposes and any legal limits tied to their tax-exempt status.

Nonprofit vs. not-for-profit

The terms overlap but are often used differently:
* “Nonprofit” commonly refers to organizations that serve broad public or charitable purposes and may qualify as 501(c)(3) charities.
* “Not-for-profit” is frequently used for organizations that serve the interests of a limited membership (e.g., private clubs or associations) and may not provide a broad public benefit.
Both types reinvest surplus funds into organizational activities and are typically governed by a board.

FAQs

Q: Can a not-for-profit make money?
A: Yes. It can generate revenue from donations, fees, sales, or services and may have year-end surpluses, but those funds must be used to support the organization’s mission rather than distributed as profit.

Q: Are all nonprofits 501(c)(3) organizations?
A: No. 501(c)(3) is a specific IRS designation for charitable organizations. Other nonprofit entities may qualify under different sections or be tax-exempt without 501(c)(3) status.

Q: Are donations to all not-for-profits tax-deductible?
A: No. Only donations to organizations that meet the IRS requirements for charitable status (e.g., 501(c)(3)) are generally tax-deductible for donors.

Bottom line

Not-for-profit organizations exist to advance particular purposes rather than to generate profit for owners. They often receive favorable tax treatment but must follow rules about how funds are used and reported. Whether a not-for-profit is also a charitable (501(c)(3)) organization affects donor deductibility and certain tax benefits.