Non-profit or not-for-profits organizations more or less work in the same way but have subtle differences which distinguish them. While both are not setup for the purpose of making returns, they are bound to make some income, the proceeds of which will be used for various purposes. For instance, a non-profit organization’s main aim is to promote welfare of the society or community it is working for. They will generate the surplus like a commercial organization but will retain it for expansion and welfare purposes. For a not-for-profit organization, the money generated may be distributed among its members. For example, the former may offer financial assistance to the needy in and out of the country, while the latter may be inclined to meet the needs of its members only, who in-turn are serving the community.
A non-profit organization will work in the same way as any business, where they would have hired staff on a full time or volunteer basis and have a board of directors. The employees will earn salaries but will not gain any other compensation from the income generated. In case of a not-for-profit organization, the members will not benefit from the income streams but will use it to fund various services. For instance, they may set up a fund raiser, where they give participants travelling allowances for selling their own goods.
While both types of organizations have a tax exempt status, their filing is relatively different according to the IRS. A nonprofit must be set up for religious, educational or charitable purposes and meet 510 (c)( 3) criteria, where as a not-for-profit must be set up for pleasure and recreational needs of the society under the 501( c)( 7) criteria.
Both have different banking needs as well, where a non-profit organization is a separate entity from its members (church, charity) as opposed to a not-for-profit organization, which is created by the members.