Not-for Profit vs. Nonprofit: Choosing a Charity

If you're interested in putting your money to work for the public good, there are two main types of charitable entities to consider: not-for profit and nonprofit organizations. Whether you want to help a local group you're deeply connected to or support a charity that addresses an important local, national, or global issue, you want your money used effectively—and mostly that's a matter of selecting the right type of organization.

There are two main types of charitable entities to consider: nonprofit vs. not-for profit organizations. Ahead, we'll look at both and explore the differences to help you consider what might make sense for you.

Most of what we think of as charities are tax-exempt organizations that operate exclusively for a charitable, cultural, educational, religious, or scientific purpose. These organizations are granted a tax-exempt status under Section 501(c)(3) of the IRS tax code, meaning donations to them are tax-deductible.

You might consider supporting a nonprofit if:

• You want to support mission-driven causes: Nonprofits are required to reinvest all earnings back into their programs, ensuring that contributions directly support their goals. Many are also required to file annual Form 990s, which provide detailed financial information, making it easier to assess how funds are used.
• You're concerned about taxes: Giving to a nonprofit while you're living can provide an income tax deduction (assuming you itemize) of up to 60% of your adjusted gross income (AGI) in the year of the donation, depending on the types of assets you donate. If charitable giving is part of your estate plan, any bequests to a nonprofit will reduce your taxable estate by the fair market value of the assets.

Another category of nonprofits, organized under Section 501(c)(4), might also be worth considering. These social welfare organizations promote "the common good and general welfare of the community" and include groups such as the American Civil Liberties Union (ACLU) and the Sierra Club. Just be aware that donations to these types of nonprofits are not tax-deductible because the funds can be used to participate in political practices, such as lobbying. 

While the terms are often used interchangeably, nonprofits and not-for profits have different purposes and legal requirements. A not-for profit organization exists primarily for the benefit of its members, often without a broader societal goal. Examples of not-for profit groups include sports clubs, social clubs, fraternities, and sororities.

Because they're not organized around a broad social cause, you typically won't get a tax benefit from donating to a not-for profit organization. Still, you might consider supporting a not-for profit that's been an important part of your life, such as a yacht club, fraternal organization, or garden society. Doing so can help ensure the group is able to continue to pursue its mission and support its members for years to come.

Once you know the type of organization you want to support, some due diligence is in order. Dig into the details to make sure the organizations you're considering supporting are good stewards of their money and run effective programs.

For nonprofits, online resources such as Guidestar and Charity Navigator can help you make that assessment. A key metric to look at is the program expense ratio, which tells you what percentage of a group's spending goes to administration and fundraising versus the activities at the heart of their mission. There are no hard and fast rules for that number, but if programs account for more than 85% of an organization's budget, it's probably doing a great job; if the ratio is below 65%, you might start asking questions. If a group spends most of its money on fundraising activities, it's an organization to avoid.

Not-for profit groups typically aren't tracked in a broad, searchable database for the general public. You may need to rely more on your own knowledge of the club or group. Make sure you understand the organization's mission, financial situation, leadership structure, and long-term goals, which can help you determine if the group is set up to manage a gift effectively.

If you're planning a substantial gift to an organization for a specific purpose, such as the renovation of a building or the creation of a scholarship, a verbal agreement about how your donation will be used is not sufficient. A large directed donation of this kind needs to be formalized with a clear contract to ensure your wishes are understood and followed. For more participation and oversight, you may consider serving in the board of directors of an organization.

If you plan to support a nonprofit or not-for profit as part of your estate plan, bear in mind that charities don't stand still: They may change, merge, or even go out of business. What if a charity named in your estate is no longer operating when you die?

To avoid this situation, you may want to name both primary and backup charities in your estate documents. You can also add language that provides flexibility to select a charity or group that serves a specific mission. That way, your executor will be empowered to make the decision about where your money goes based on your directions and wishes.

Another option is to direct your bequests into a donor-advised fund. Gifts to donor-advised funds are tax-deductible, and the assets within can be invested for potential growth. You can recommend grants to 501(c)(3) organizations all at once or over time, if you want to get to know an organization before making a large funding commitment.

Bottom line, giving back to the causes and groups you care about can be a life-affirming way to make a difference in your community and beyond. And having a solid understanding of how those organizations operate will only help ensure that more of your wealth goes to the priorities you value.