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

This question was posted on my Facebook wall today. The answer was a bit more extensive than I wanted to post on Facebook, so I’m reposting the original question (along with my answer) here for all to read and comment…

Question:

Is there a difference between non-profit and not for profit?  I would love to do a foundation but I know my partner would like to make enough to decrease her hours at the office and put her hours into the business. What are your thoughts?

Answer:

For many people, the terms “non-profit” and “not for profit” are interchangeable. However, there can be subtle differences between the two.

A “Nonprofit” is generally an organization with a 501(c)3 IRS designation which allows them to receive charitable donations, and have the donor claim such donations on their taxes. Most non-profit organizations are formed around a “cause” or area of focus such as Salvation Army helping the poor, Boy Scouts of America training tomorrow’s leaders, or your local Sertoma civic club promoting hearing health and awareness across the country.

A “not for profit” is an entity which exists to serve a community or cause, but it’s not in the business of soliciting donations, but is rather a more traditionally-run business. The best example of a “not for profit” that I can come up with is a Credit Union. Unlike a bank (blech!), a credit union is charted by and owned by it’s members, so any excess “profit” at the end of the year is returned to it’s members.

To answer the second part of your question:

Many non-profit and not-for-profit organizations have paid employees, including board members, staff, and even a president. So it is possible to have a “nonprofit” organization that is chartered to serve a community or cause, may receive favorable tax and social benefits AND pays a salary to the founders of the organization itself.

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DISCLAIMER: I am neither a licensed tax adviser nor an attorney. This response is my opinion only, and may or may not be accurate depending on your particular situation. Please consult an attorney and a tax adviser before acting on any advice you read here.