How Do Nonprofits Make Money?

The term "nonprofit" could make you think that nonprofit organizations or corporations do not make profits. Being a nonprofit means 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. Their goals could be educational, charitable, or religious. Nonprofit organizations profit through fundraising events, galas, and small business sponsorships.

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Ways for Nonprofit Organizations To Make Money

There are many ways for nonprofit organizations to make money. Like for-profit organizations, nonprofits must implement a business plan and marketing strategy for funding. Common ways that nonprofit organizations make money include:

• Auctions
• Corporate sponsorships
• Individual donations
• Endowments
• Galas
• Grants
• Memberships
• Selling goods
• Selling services

Donations and sponsorships are tax deductions for donors as long as the nonprofit is a tax-exempt organization.

Donations, Grants, and Earned Income

Donations can come from private individuals. In some cases, private individuals donating money to a nonprofit organization can report the contribution on their tax returns. There is a tax incentive for charitable donations. Some individuals may be willing to commit to donations by the month or by the year.

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 otherwise have to pay for.

You could apply for grants from the government, for-profit companies, or other public charities to help fund your nonprofit. There are also private foundations that offer grants to nonprofits. Before applying for a grant, make sure that your nonprofit's goals connect with those of the foundation.

Last but not least, nonprofit organizations can earn money from sales. Some resell donated items for funding. Others offer services for a fee to the public. For example, a nonprofit organization focusing on education could host classes for the community. A nonprofit weightlifting club could sell gym memberships to its facilities and charge a fee for these classes. This opens the nonprofit up to a source of income and revenue stream.

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. Your board of directors signed your corporate bylaws so you've also applied for tax-exempt status. You're ready to plan activities to raise funds for your organization. What type of activities should you do?

The nonprofit's income is tax-exempt as a 501(c) organization. Your fundraising activities should align with your organization's mission. A board member cannot profit from the nonprofit or the nonprofit's activities as a sole for-profit business owner can.

Nonprofit Profits and Taxes

Profits from activities related to the organization's purpose are often exempt from taxes if the organization is granted 501(c) status from the IRS. However, nonprofit founders should be careful when making money from activities unrelated to the organization's purpose.

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 raffle gift cards for local restaurants. This activity does not relate 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 nonprofit's purpose. In addition to paying taxes for unrelated business income, a nonprofit could face penalties or lose tax-exempt status altogether. 

If you plan fundraising activities unrelated to your organization's purpose, use volunteers instead of paid staff. Limit how often you do these activities. However, there are unrelated activities that are exempt from taxation.

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, paid staff might also be needed.

Can Nonprofit Employees Make Money?

A 501(c)(3) business entity cannot do business to benefit private interests. However, for a nonprofit to attract people who will dedicate work hours to their mission, they may need to provide compensation. Nonprofit employees can 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. The salaries must be reasonable to the services and experience provided by the employee.

It's common for nonprofits to hire an Executive Director as a staff member. This Executive Director is not a board member and cannot vote at board meetings.

Can the Founder of a Nonprofit Make Money?

The founder of a nonprofit can be paid reasonable compensation for their work if they are either an executive director or an employee. There is no minimum amount for reasonable compensation. The IRS may look at similar organizations' salaries. You could lose your tax-exempt status if too much of your business income and bottom line goes to wages.

What Nonprofits Can Do with Profits

Profits from a nonprofit can go toward operating expenses, including office supplies, equipment, and utilities. The board of directors for a for-profit corporation may choose to distribute profits to shareholders. In a nonprofit corporation, profits do not go to shareholders or officers.

Contact an Attorney About Your Nonprofit

Contact a business and commercial lawyer today if you have questions about how your nonprofit can make money and what to do with the profits. An attorney could help you make the best decisions for your organization.