Online Fundraising
December 8, 2021

Difference Between a Nonprofit Organization (NPO) and a Not-For-Profit (NFP) Organization

You may have heard of the terms non-profit and not-for-profit thrown around casually and used interchangeably. It is often assumed that these two mean the same thing—but that’s a common misconception. Both non-profits and not-for-profits have different business structures with varying tax implications, governance, and functionalities. And just like any for-profit organization, these two entities also make profits but the key difference lies in how these profits are utilized.

What is an NPO? 

Non-profit organizations (NPOs) are tax-exempt entities that have a mission and purpose associated with one or more social causes. Examples of NPOs include hospitals, universities, national charities, foundations, etc. 

Key distinguishing features of an NPO

  • An NPO must cater to public good in some shape or form;
  • They can operate in several categories with a focus on public benefit; 
  • Profits are usually only directed towards the advancement of the organization; 
  • All operations and financial status are open to the public to ensure donors feel confident when choosing an NPO; 
  • Donations made to an NPO are tax-deductible; 
  • NPOs do not pay income tax on funds raised via donations or through fundraising campaigns;
  • In the United States (U.S.), NPOs are granted 501(c)(3) status by the Internal Revenue Service (IRS). 

What is an NFP? 

A not-for-profit (NFP) organization, like the name suggests, does not operate with the intention of generating profit. Instead, all income earned through donations and other events is channeled back into running the NFP. A sports club that exists simply for the pleasure and entertainment of its members is a good example of an NFP. Theatre, dance and music groups, religious fellowships, educational and literary societies, etc. are all examples of NFP entities.

Key distinguishing features of an NFP

  • Unlike an NPO, an NFP is not mandated to operate for the public’s benefit;
  • An NFP does not distribute earned profits among its owners or shareholders; 
  • NFPs based in the U.S. must apply for tax-exempt status from the IRS, including exemptions from sales and property taxes;
  • Donations made to an NFP are usually not tax-deductible.

Can an NPO or NFP fundraise through online charitable raffles?

There are very strict regulations regarding who can and cannot conduct charitable gaming in each U.S. state or Canadian province. Guidelines, criteria, and requirements have been clearly defined on the respective Government websites. 

In most jurisdictions across the United States and Canada, charitable raffles and lotteries are highly regulated. And to run such events, organizers need a license. As an NPO or an NFP, you will have to check the qualifying criteria for each U.S. state or Canadian province/territory where you intend to run the raffle. 

In the U.S., states such as Utah and Hawaii have stringent laws regarding online raffles but most states allow holding such events. As rules and requirements vary by state, it’s a good idea to check with your state’s Attorney General's office for the latest regulations. 

In Canada, it is illegal to run an online charitable raffle without a license and only religious and charitable organizations can apply for one. Rules vary by province. The provincial Alcohol and Gaming Commission websites are good starting points for research on the rules, regulations, and the application process.

Related: An Introduction to Online Gaming-based Fundraising for Nonprofits

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Difference between an NPO and an NFP

Listed below are some key differences between an NPO and NFP:

Intent, scope, and end goal

  • NPO: They have a mandate to support social causes and are explicitly formed to benefit the public.
  • NFP: They exist to mainly cater to the organizational objectives and are not mandated to benefit the public. 

Entity type

  • NPO: They have a separate legal entity. Most countries have stringent laws that regulate the establishment and management of NPOs. They also need to comply with corporate governance regimes.
  • NFP: They cannot be a separate legal entity; however, they can incorporate if they want to.

Operations and finances

  • NPO: Their operations are similar to that of a business where they try to earn a profit. Most larger charities are required to publish their financial reports and show their income and expenditure. NPOs are granted 501(c)(3) status by the IRS.
  • NFP: They are typically considered as “recreational organizations” that do not operate with the goal of earning a profit or revenue. They do not have an obligation to disclose their finances to the public. NFPs are governed by IRS tax code section 501(c), but depending on their purpose they could fall under a different section, like section 501(c)(7).

Employees

  • NPO: They may have paid employees but their pay checks do not come from any of the fundraising efforts. 
  • NFP: Generally, these organizations only work with volunteers.

Sources of revenue

  • NPO: Their main sources of revenue include donations, fundraising campaigns, membership fees, etc. 
  • NFP: These entities do not necessarily depend on donations and their revenue sources may involve selling a product or service, and making profits by undertaking various activities relevant to their area of function.

Accounting standards

  • NPO: NPOs and charities follow very stringent accounting standards as they have to be transparent and show how they have utilized the funds.
  • NFP: Since NFPs are not required to report funds and expenditures, their accounting standards are much less rigid in comparison.

Size of organization

  • NPO: These organizations are run by a large group of people compared to most NFPs.
  • NFP: Most NFPs are much smaller than NPOs.

The two organizations are similar in many ways, particularly in the aspect that neither exists for the sole purpose of making a profit. But the key thing to remember here is that while an NPO can function as an NFP, it cannot be the other way around. Both of these entities exist to serve other humans in some way, form, and capacity—and work towards the improvement of society overall.

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