My generally-genteel wife, feet tucked demurely under an evening TV blanket, sipped her tea and then barked…
N has to be for Nonprofit so you can tell those f@*$#@ing morons that nonprofit does not mean you can’t make a profit!
Those idiots will even argue that it’s f@*$#@ing illegal to make a profit…
…so violently that the La-Z-Boy footrest nearly collapsed.
It’s been 25 years since she worked as the CFO at her second nonprofit entity, but I guess old wounds never heal. She says it was the thing about working for nonprofits that bugged her the most. People never understand what they are.
So take it from the lips of the expert, folks.
Nonprofit doesn’t mean you don’t make a profit.
What does it mean?
What Happens to the Profits
The definition of a nonprofit is really simple, and it does involve making a profit. A nonprofit is an entity that puts the earnings back into the function of the business instead of distributing money back to shareholders. The entity can’t issue stock or pay dividends, as a for-profit business would do, which means it also isn’t “owned” by anyone.
The nonprofit is created to carry out a program that benefits some specific group, typically educational, religious, scientific, or community-based. The assets and debts are owned by the entity itself, e.g. a foundation, and all net earnings flow back into the entity.
One site also labels nonprofits as “non-commercial.” That’s descriptive but, to my mind, slightly misleading. You could have a storefront, for example, that sells handicrafts, then disburses some of the proceeds as community grants. A nonprofit can earn money in various ways; the restrictions occur in what it does with the money.
Nonprofits Also Not Always Charities
Charities are subsets of nonprofits whose express purpose is to benefit the general public, again through educational, religious, or other community-based ways. It’s easier to understand this by thinking about nonprofits that aren’t charities. Examples would include things like labor unions, trade associations, or hobby clubs. All of these organizations don’t have shareholders and don’t siphon earnings off to the “owners,” but rather push all incoming funds received back into the operations of the group.
Sometimes You Want the IRS Involved
Nonprofits and charities don’t have to be tax-exempt. You can operate a charity without getting the IRS involved. You can create GoFundMe sites to collect money. Just because someone asks for money doesn’t mean it’s a charity, and even when everyone is donating and receiving with charitable intentions, that doesn’t make it a formal charity. Not as far as the IRS is concerned.
The IRS has a set of rules for when nonprofits can operate as tax-exempt entities, as well as when money they collect can be considered tax-deductible. This is where the famous 501c(3) designation comes in. A nonprofit that wants to gain that charitable 501c(3) status has to comply with a whole host of requirements by the IRS. If the entity is nonprofit but not charitable, say a 501c(4) or (5), etc., it still has legal requirements to fulfill, but they are generally less restrictive.
Another misconception is that nonprofits are run by volunteers. In fact, a well-run nonprofit will often have a professional (albeit small) staff. Some nonprofit entities have been notorious for having executives who siphon large salaries off for themselves, but those are especially pernicious examples because they are rare.
Nonprofits which pay too much to their executives or spend too much on fund-raising activities should be avoided. Sites like Charity Navigator have been helpful in sussing those out.
All in all, nonprofits can exist for a variety of reasons but losing money is not one of them. Ideally, a nonprofit wants to grow its income as much as any for-profit business because the more it earns, the more people it can help in its core mission.
Tis the Season
Since we’re on the topic of charities, this is an excellent time to consider making a donation. Have you managed to squeeze out a little extra, maybe twenty bucks, from tax refunds or stimulus payments? Perhaps some of that could be plowed back into your favorite local nonprofit, now that you are clearer about what they are.
And did you know… as part of the American Rescue Act legislation, taxpayers in 2021 can deduct up to $300 in charitable donations without having to itemize. That should make giving a little easier, so maybe you have an extra $20 that would be well-used by your local food bank, soup kitchen, library-getting-back-on-its-feet, school-about-to-reopen, or take-your-pick?
But don’t you dare spread any more misinformation about the definition of nonprofit. You don’t want to make the lady in the purple shoes mad.