On this page
- What is ‘not-for-profit’ and ‘for-profit’ and how are they different?
- Charities and not-for-profit organisations
- Can a not-for-profit organisation make a profit?
- Why do you need to decide if you are ‘not-for-profit’?
- What is a social enterprise?
- How do you start a not-for-profit organisation?
Once a community group is clear about its aims, membership and activities, it’s important for the group to decide whether to operate as a not-for-profit organisation or a for-profit organisation. Whether your organisation is ‘not-for-profit’ or ‘for-profit’ is important because:
- there are different legal structures for, and different laws that apply to, ‘not-for-profit’ and ‘for-profit’ organisations
- certain benefits apply to a not-for-profit organisation, and
- you need to be clear with those involved in your group and with donors, government and the public about what your organisation does and how it uses its money
What is ‘not-for-profit’ and ‘for-profit’ and how are they different?
What is profit?
Profit is an organisation’s financial gain. This is the extra money an organisation has from its revenue that is left after accounting for all the costs of doing business, such as its bills and other expenses.
Examples of revenue include membership fees, government grants and profits from selling products (like merchandise or op shop goods). Examples of expenses include lease costs, room hire, catering, telephone bills, insurance premiums and employee wages.
What is a not-for-profit organisation?
A not-for-profit organisation doesn’t operate for the profit, personal gain or other benefit of its members either during its operation or if it winds up (closes down). Rather, any profit made is used to further the aims of the organisation (or if the organisation is a registered charity, its ‘charitable purposes’). That means all profits are put back into the organisation to continue to pay for its activities and functions and to achieve its mission.
For example, a not-for-profit organisation may further the aims of the organisation by saving the profits to start a new project, employ additional staff or keep a reserve amount from the profits to ensure the sustainability of the organisation.
A not-for-profit organisation will fall into two broad categories:
- charities, and
- other not-for-profit organisations that are not charities – for example, most sporting and recreational clubs, community service organisations, cultural and social societies and professional and business associations
What is a for-profit organisation?
In contrast, a for-profit organisation is set up to make a profit for the people who are shareholders, members or owners of the organisation.
In a for-profit organisation, profit can be distributed among the members, investors or shareholders of the organisation, while the organisation is in operation or when it ends. If this is the case, the organisation is a for-profit organisation – or a business.
If you want to set up a 'for profit' organisation, the Victorian State Government website has information to help start up a business in Victoria. The Federal Government website provides information for people who want to start up businesses in Australia.
How are for-profit organisations different from not-for-profit organisations?
It can seem confusing that some for-profit organisations operate in the community sector (for example, in childcare and aged care).
The clear differences between for-profit and not-for-profit organisations are that, in a for-profit organisation:
- the profit may be distributed to the organisation’s owners, or to individual members or shareholders (this can’t happen in a not-for-profit organisation), and
- people 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)
Charities and not-for-profit organisations
While all charities are not-for-profit organisations, not all not-for-profit organisations are charities.
To be a charity, as defined by the Charities Act 2013 (Cth) (Charities Act), all of the following conditions must be met:
- the organisation is not-for-profit
- all of the organisation’s purposes are:
- charitable purposes that are for the public benefit (as defined in the Charities Act), or
- purposes that are incidental or ancillary to, and in furtherance or in aid of the charitable purposes of the entity,
- none of the organisation’s purposes are disqualifying purposes (as defined in the Charities Act), and
- the organisation is not a person, a political party or a government entity
Can a not-for-profit organisation make a profit?
Yes. In fact, it's a good idea if you want to further your aims, support an event or start new programs. It is also useful to ensure the financial sustainability of your organisation if your revenue can be unpredictable, and particularly if your organisation relies on government funding.
Not-for-profit 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’s what the organisation does with the profit which makes an organisation not-for-profit. As said above, profits need to be directed to furthering the mission of the organisation, rather than distributed.
If a not-for-profit organisation comes to an end, any remaining funds or assets need to be transferred to another not-for-profit organisation with similar purposes, in accordance with the dissolution or winding up clause in the organisation’s rules or constitution.
Why do you need to decide if you are ‘not-for-profit’?
Different laws apply to not-for-profit and for-profit organisations. Many of these laws treat not-for-profits favourably because the organisation hasn’t been set up by people for their own personal gain.
Some of the benefits of being a not-for-profit organisation are that:
- some legal structures are only available to not-for-profit organisations (like an incorporated association, special purpose company limited by guarantee, non-distributing co-operative without share capital or charitable trust)
- there are exemptions, concessions and benefits for eligible not-for-profit organisations, including tax concessions (although being ‘not-for-profit’ is only one of a number of requirements)
- some government grant programs and many private philanthropic bodies are set up only to fund not-for-profit organisations, and
- some laws only allow certain not-for-profit organisations to apply for registration to conduct certain fundraising activities (like minor gaming activities)
Our Not-for-profit Law program is Justice Connect's specialist service for charities and community groups. Justice Connect is a registered charity with the Australian Charities and Not-for-profits Commission.
We have published information about incorporation, legal structures, tax laws, funding and fundraising. However, if members of your organisation want to make money or a personal gain from the activities of the organisation (other than as reasonable payment for wages if they are employed by the organisation), we can’t help.
We only provide legal information on not-for-profit organisations. You can find information on establishing a for-profit business on the Australian Tax Office website.
What is a social enterprise?
A social enterprise is not a legally recognised classification but usually refers to a legal structure designed to achieve a particular social outcome, and which uses market-based strategies (like trading in goods or services) to achieve this outcome. For example, a social enterprise may direct its profits to a particular cause, trade only in certain kinds of products (such as ethically made products) or employ underemployed populations.
The choice between ‘not-for-profit’ and ‘for-profit’ is not always straightforward for social enterprises. There are many not-for-profit social enterprises, and many for-profit social enterprises, the difference being that not-for-profit social enterprises invest all profits towards their mission, rather than distributing to shareholders or investors.
The key consideration that will drive a choice between for-profit and not-for-profit for a social enterprise is where funding will come from, and what funders will expect in return from the organisation.
- some social enterprises operate for the benefit of their members and are set up as ‘for-profits’ with shareholders, or as trading co-operatives
- some social enterprises seek investors, and offer returns to those investors (normally on a different basis to a normal enterprise, with some profits added back to the enterprise, and some distributed to investors), and
- some social enterprises get seed funding from philanthropic sources or the government, and then generate their own profits to sustain the enterprise – these enterprises are normally set up as ‘not-for-profits’
How do you start a not-for-profit organisation?
There are a few key legal issues to consider when starting a not-for-profit organisation.
Make it clear to everyone involved that you are ‘not-for-profit’
Then everyone knows:
- they can't personally receive profits from the organisation, and
- all the organisation’s money and assets must only be used to further the purposes of the organisation
Make it clear in any public interactions that you are a not-for-profit organisation
Many of the benefits available to not-for-profits (for example, low cost incorporation, tax concessions and the ability to conduct fundraising activities) may only be accessed by your organisation when it can prove its not-for-profit status.
Think about rules or constitution and statement of purposes for your organisation which describe its aims, structure and processes
You will need to include certain wording to say that you are prevented from distributing profits or assets for the benefit of members – both while the organisation is operating and when it winds up.
Include the Australian Taxation Office’s non-profit and dissolution clauses in your organisation’s constitution or rules. See the wording provided by the Australian Taxation Office (ATO). This wording (or similar wording carefully drafted by a lawyer or accountant) will be recognised and accepted by government departments, regulators and grant-makers when your organisation applies for government concessions or for funding.
ATO’s suggested wording for the two key clauses for an organisation’s constitution to indicate that the organisation is ‘not-for-profit’
'The assets and income of the organisation shall be applied solely in furtherance of its abovementioned objects and no portion shall be distributed directly or indirectly to the members of the organisation except as bona fide compensation for services rendered or expenses incurred on behalf of the organisation.'
'In the event of the organisation being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for the profit or gain of its individual members.'
The Australian Charities and Not-for-profits Commission (ACNC) has published a sample constitution for companies limited by guarantee that are or will become registered with the ACNC as charities, which includes example not-for-profit (see clause 8) and winding up (see clause 69) clauses.
The content on this webpage was last updated in March 2022 and is not legal advice. See full disclaimer and copyright notice.