I'm glad that you were able to resolve your issue and thank you for posting your solution so that others experiencing the same thing can easily reference this! Since the Microsoft Q&A community has a policy that "The question author cannot accept their own answer. They can only accept answers by others", I'll repost your solution in case you'd like to accept the answer.
Issue:
You were having issues login in with your Office 365 E2 account without logging into your locally first.
Have a Windows 11 Home edition laptop that I am trying to log in to with an E2 O365 not for profit ID. The 365 account works fine with web apps etc. However unable to log into laptop with this ID (says account is not a Microsoft account when trying to create a new account on the laptop). Read a number of forums and was told i needed windows pro, so have updated to Pro...still have the same issue. Tenant is permitted for "Users may join devices to Azure AD" set to All I can however create a local account on the laptop and then add a work/school account, this seems to work fine but I am still logged in locally. Please, please, please is there a way to log into the laptop with the office 365 E2 account without logging into the laptop locally first. Its really confusing for the colleagues using the device
Solution:
To resolve your issue, you joined your device to Azure AD in order to login.
If I missed anything please let me know and I'd be happy to add it to my answer, or feel free to comment below with any additional information.
I hope this helps!
If you have any other questions, please let me know. Thank you again for your time and patience throughout this issue.