How Do Nonprofits Make Money?
The term "nonprofit" could make you think that nonprofit organizations or corporations do not make profits. The real meaning of the term "nonprofit" is that making profits is not the organization's purpose. The purpose of a nonprofit organization is to serve the public good.
There are many different types of nonprofit organizations. The goals of the organization could be educational, charitable, or religious, for example. Even though the organization's purpose is not to make profits, nonprofit organizations can and do make profits.
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Ways for Nonprofit Organizations to Make Money
There are many ways for nonprofit organizations or corporations to make money. Common ways that nonprofit organizations make money include:
- Selling goods
- Selling services
Donations, Grants, and Earned Income
Donations can come from private individuals. In some cases, the private individuals who donate money to a nonprofit organization can report the contribution on their own tax returns. There is a tax incentive for charitable donations. Some individuals may be willing to commit to a monthly or yearly donation.
In addition to monetary gifts, your nonprofit could receive "in-kind" donations from individuals or businesses. With "in-kind" donations, the individual or company provides an actual item to the nonprofit that the nonprofit founders would typically have to pay for.
You could apply for grants from the government to help fund your nonprofit. There are also private foundations that offer grants to nonprofits. Before applying for a grant, it could be helpful to make sure that the foundation's goals and the goals of your nonprofit are connected.
Finally, nonprofit organizations can earn money from sales. Some nonprofits receive donated items, which they then sell. Nonprofits can also make money from the services that they provide to the public. For example, a nonprofit organization that focuses on education could host classes for the community. They could charge a fee for these classes.
Maintaining 501(c) Status and Making Profits
Let's say you've done all of the groundwork to form a nonprofit corporation. You've filed the articles of incorporation with the secretary of state and made corporate bylaws. You've also applied for tax-exempt status. You're ready to plan some activities to raise funds for your organization. What type of activities should you do?
As a 501(c) organization, you are entitled to tax exemptions on the nonprofit's income. However, there is an essential factor to consider when choosing the types of activities that bring in profits for your nonprofit organization. Consider whether or not the activities relate to the purpose of your organization.
Nonprofit Profits and Taxes
Profits that come from activities related to the purpose of the organization are typically exempt from taxes. However, founders of nonprofits should be careful when making money from activities unrelated to the purpose of the nonprofit.
Unrelated business income tax is a tax that may apply to nonprofit income that comes from unrelated activities. For example, your nonprofit focuses on helping adults get a GED. To raise money, you decide to raffle off gift cards for local restaurants. This activity may be considered to be unrelated to the purpose of adult education. This means that the profits that the raffle brings in may be taxed as unrelated business income.
A bigger problem could result from continuing to conduct activities unrelated to the purpose of the nonprofit. In addition to paying taxes for unrelated business income, a nonprofit could face penalties or lose tax-exempt status altogether. If you plan to do any fundraising activities unrelated to your organization's purpose, use volunteers instead of paid staff and limit how often you do such activities. There are unrelated activities that are exempt from taxation, however.
Salaries and Compensation for Nonprofit Employees
Many nonprofit organizations rely on help from volunteers to keep the organization running. Depending on the size and type of organization, there might also be a need for paid staff.
Can Nonprofit Employees Make Money?
A 501(c)(3) corporation cannot do business for the benefit of private interests. However, for a nonprofit to attract people who will dedicate work hours to their mission, they may need to provide compensation. Fortunately, nonprofit employees are allowed to earn fair compensation for their work.
Employee salaries are a type of operating cost. The money you make to cover the costs and expenses of running your nonprofit can go to paying these salaries.
Can the Founder of a Nonprofit Make Money?
The founder of a nonprofit can get reasonable compensation for their work. There is no set amount for "reasonable compensation."
However, the IRS may look to the salaries that other founders of similar organizations make to determine what is reasonable. If too much of your business income goes to wages, you could lose your tax-exempt status.
What Nonprofits Can Do with Profits
Profits that a nonprofit makes can go toward operating expenses. This could include office supplies, office equipment, and utilities. There is a difference between what nonprofit corporations and for-profit corporations can do with their profits, though.
The board of directors for a for-profit corporation may choose to distribute profits to shareholders. In a nonprofit corporation, profits are not to be distributed to shareholders or officers. Earnings from a nonprofit should be put back into the business.
Contact an Attorney About Your Nonprofit
If you have specific questions about how your nonprofit can make money and what to do with the profits, contact a business and commercial lawyer today. An attorney could help you make the decisions that are best for your organization.
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