Terms for Nonprofits Defined

As you may know, there are several different terms used to describe “nonprofity” types of organizations: 

  • Nonprofit

  • Not-for-profit

  • Charity

  • Non-governmental Organization (NGO)

  • For-purpose Organization 

Is there a difference between these terms, or are these all terms that essentially mean the same thing? Do the different terms mean that the organization operates differently?

Here’s what we’ve uncovered to clarify any confusion around the type of entity.

There IS a Difference Between the Terms Nonprofit and Not-for-Profit 

When we first started writing this article we thought that “nonprofit” and “not-for-profit” were simply two terms that were used colloquially for the same type of organization. While that’s true, we also learned that there are some important distinctions between these two entities. 

To begin with, there are some regional differences in terms of laws and tax implications. In the US, a nonprofit does not distribute any profits from its activities to shareholders or owners. Instead, it uses its funds to further its mission or cover the costs of running the organization.

A nonprofit qualifies for tax-exempt status in the US and must have a purpose to serve the public good or further a social cause. Nonprofits must make their operational information public, allowing donors to see exactly how they use their funds. Donors are allowed to take a tax deduction on their contributions to nonprofits.

A US-based not-for-profit also doesn’t return profits to owners and puts the funds back into running the organization. A key difference is that the not-for-profit doesn’t have to operate for the public good. It could exist simply to serve its members, such as a sports club or social club. Not-for-profits must apply for tax-exempt status, and donors can’t claim a tax deduction for their contributions. Not-for-profits don’t have paid staff; they are run by volunteers. Additionally, while nonprofits may have a separate legal entity, not-for-profits can’t. 

Australia commonly uses the term not-for-profit with a similar setup to US nonprofits. These organizations can profit as long as the funds go back into the organization. They may be run by a mixture of paid staff and volunteers. Any spending, such as on staff salaries, building costs or projects, is tightly regulated and must be congruent with the organization’s mission. There is crossover in Australia, where some not-for-profits may also be considered a charity or an NGO.

What about Charities?

People often use “charity” as a catch-all, meaning “doing good.” Charity refers to a specific type of organization, depending on the regional definition.

As a general rule, all charities are non-profits (or not-for-profits), but not all nonprofits are charities. In the US, a charity has some precise definitions via the IRS, with multiple examples tried in court to declare the organization a charity. Examples include:

“Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments or works; lessening of the burdens of government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.”

Australia is similar in that an organization can only be a charity if it meets criteria for “charitable purposes” set out under the law. There are twelve broad charitable purpose categories, and the organization must fall under one of them. 

Charitable status matters for the terms of taxation rules. This truth is fairly common across multiple countries, however, you’d need to know the specific requirements of your own state or country. (In the US, the organization must first be recognized as a charity at a state level before the IRS will consider it.)

Non-Governmental Organizations (NGOs)

NGOs or “non-governmental organizations” originated from the charter of the newly formed United Nations back in 1945. These are entities that operate independently of government influence, although some may apply and qualify for government funding.

In the US, there are around 1.5 million NGOs, with many also operating internationally. These organizations undertake various activities, including political advocacy and social and environmental issues. They are often integral elements of creating positive changes in communities.

NGOs can apply to be exempt from state and federal taxation, although not all qualify for charitable status. NGOs organized for political purposes receive limited tax exemptions. 

In Australia, NGOs are not-for-profit organizations set up independently of government influence. Most of the time, an NGO deals with large, widespread issues. For example, organizations that provide disaster relief or combat human trafficking. On the other hand, not-for-profit organizations often address smaller-scale issues within communities.

For-Purpose Organizations

“For-purpose” organization is a term adopted worldwide to describe an entity that puts its mission or purpose over and above the organization itself. This definition from Australia says:

"For-purpose organisations are a collection of people who have come together because they share a common goal for society. Using archetypes to communicate your values allows your audience to see themselves reflected in you, to understand you and to make a choice to partner with you."

A for-purpose organization could be an NGO, charity, nonprofit, not-for-profit or for-profit. For-profits that fall into this category likely have a social or environmental mission in addition to their pursuit of profit. The social mission is embedded across the business into production processes, products, culture, relationships with employees, suppliers and customers. The worldwide movement of B Corporations is a great example of for-purpose businesses.

Conclusion

In social and nonprofit work, you’ll come across many different types of organizations. Terms can mean slightly different things in different regions, although commonly, they overlap with one another.

If you understand these different terms, you can understand how each organization operates within its service area.