This fact sheet explains the term "nonprofit" and the difference between a nonprofit (or not-for-profit) organisation and a for-profit (businesses) organisation.
You have decided to set up a group and are now clear on what your mission, objectives, membership and activities are. The next decision to make is whether your group is going to operate on a nonprofit or for-profit basis. This is important because there are different legal structures for ‘for-profit’ and ‘nonprofit’ organisations and different laws apply to each. Some laws refer to legal structures (such as incorporated associations) not being formed for financial gain of the members or pecuniary gain of members.
What is ‘profit’?
This term is confusing because most organisations need money to carry out their activities. An organisation may raise money by charging its members fees, holding raffles, seeking donations from the public, applying for grants of money from the government, or in many other ways. An organisation will have a ‘profit’ (a surplus) if it has extra money left over, after it has paid all its bills and expenses (for example, paying room hire, coffee and tea expenses, telephone bills, insurance premiums and employee wages).
Can a ‘nonprofit’ organisation make a profit or surplus?
Yes. Whether your organisation is a ‘nonprofit’ organisation is determined by what your organisation does with that profit, not by whether your organisation makes a profit.
In a ‘nonprofit’ organisation, the profits are not paid to the individual members of the organisation while the organisation is in operation or when it ends. Instead, any profit that the organisation makes must be used to further the purposes of the organisation. That is, the profits are re-invested (put back) into the organisation, to continue to pay for its activities and functions.
In fact, it might be a good idea for a nonprofit organisation to aim to have a small profit each year, to be able to pay for unexpected expenses or to start new programs. Nonprofit organisations can also:
- employ people and pay them reasonable salaries;
- make money by charging members of the public for services;
- make money by selling or leasing property; and
- invest money in shares and receive dividends.
It is what the organisation does with the profit, (rather than the fact it might have made a profit), which makes the organisation nonprofit. For example, in a nonprofit organisation, any of the profits that the organisation makes (from the sale of services or property) must be used to carry out the organisation’s purpose and must not be distributed to members or any other individuals.
What is a ‘for profit’ organisation and how is this different?
In a ‘for-profit’ organisation (such as a business), the profit may be distributed to the organisation’s owners, or to individuals members or shareholders. In a ‘for profit’ organisation, people who are involved in the organisation are entitled to receive a personal benefit from the profits of the organisation (such as a dividend, or money when they sell their shares, or a payment directly from the profit). It can be a little confusing as some of these ‘for-profit’ organisations operate in the community sector (for example, in childcare and aged care).
Different laws for nonprofits
It is important to know the difference because there are different laws that apply to ‘for-profit’ and ‘nonprofit’ organisations. Many of these laws treat nonprofits favourably – on the basis that the organisation hasn’t been set up by people to make a personal profit, and that the resources of the organisation will be put back in to helping the community. For example:
- legal structure: if your organisation wants to incorporate, there are particular legal structures that are only available to nonprofit organisations (such as an incorporated association);
- tax laws: the tax laws offer a number of tax exemptions, concessions or benefits to eligible
- nonprofit organisations (although being not-for-profit is only one of a number of requirements);
- funding: some government grant programs and many private philanthropic bodies are set up only to fund nonprofit organisations; and
- fundraising: some laws only allow nonprofit organisations like charities and communitygroups to apply for registration to conduct certain fundraising activities (like minor gaming activities).
Queensland laws relating to incorporated associations.
The Associations Incorporation Act 1981 (Qld) provides a legal simple legal structure for associations that are not formed for the purpose of providing financial gain to members.
Financial gain is extensively defined in section 4 of the Act and while a little difficult to read because it is couched in the negative of what is not considered financial gain by listing a number of activities. For example it would not be considered financial gain if:
- the association makes a financial gain, but no part of the gain is divided among, or received by, any of the association’s members;
- the association is established to protect or regulate a trade, business, industry or calling (the pursuit) engaged in by its members, or in which they are interested, but the association does not itself engage or take part in the pursuit;
- the association provides its members with facilities or services;
Associations may also pay wages, members can compete for prizes and trophies and can trade so long as it is ancillary to the principal purpose of the association.
This fact sheet is based on material produced by the Not for Profit Law Information Hub. We acknowledge their support in allowing us to adapt their material for Queensland community organisations. This fact sheet may be used for personal use, or non-commercial use within not-for-profit organisations. However, this does not constitute legal advice. If you or your organisation has a specific legal issue, you should seek legal advice before making a decision about what to do.