A non-profit organization is a business or a corporation that has been given tax-exempt status by the Internal Revenue Service (IRS). It is a religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention mission or area of work. The primary purpose of non-profit organizations is not to make money. It is making a positive impact on society. However, like any other institution, even non-profit organizations need money to function. They still need funds and profits for their services, but the funds earned do not benefit a single owner or are specifically not sought for the profits’ sake.
Even though non-profits have their ways of earning income, it is very different from organizations that work for-profit.
Non-profit vs For-profit income
- The majority of businesses are for-profit. The primary purpose of these businesses is to make a profit, defined as revenue left over after covering expenses, which is then distributed to owners, shareholders, or reinvested in the business. Non-profit organizations, on the other hand, work for the greater good of the public. The income they earn is not focused on the financial gain of any person or group of people.
- For-profit businesses pay multiple different types of taxes on their income. Because they are meant to support the public good, non-profits receive tax exemptions. These exemptions vary from one place to another.
- Non-profits do not receive additional compensation based on how much money the organization generates, unlike for-profit organizations.
Making money from non-profit organizations
Here are a few ways how people in non-profit organizations generate incomes and make profits:
1. Volunteers and Donations
A large section of the non-profits’ income depends on the generosity of people. People either make donations in the form of money or kind, or they can volunteer their time helping those in need. If the charity is trustworthy and well-established, people love to donate their time to support their favourite causes. According to the Volunteering in America Report from the Corporation for National and Community Service, one statistic shows that in 2018, 30.3 percent of Americans volunteered time, working for a combined total of 6.9 billion hours. Usually, holiday seasons are especially lucrative. People have more time during holidays and feel a need to help others in auspicious seasons.
Another large chunk of non-profits’ income comes from fundraising, which accounts for approximately 70 percent of all profits made. Hence, again like volunteerism and donations, fundraisers depend on the general public’s generosity supporting the charities. Different organizations raise money from fundraisers in different ways. For example, Girl Scouts is a youth non-profit organization for American girls worldwide. They sell cookies and other treats door-to-door, earn medals and raise money for their organization. Other organizations sell other products like knives, books, etc., to raise money. Some top organizations organize fancy dinner parties to provide an inside of the charities. Affluent influencers and philanthropists from all over pay high amounts to be a part of the party.
People working in non-profits do have salaries. Again, a large portion of these depends on the donations made to the charity. The salary structure depends on many factors, including the position one holds, how established the non-profit is, etc. However, since non-profits exist to serve people and not for financial gains, the salaries one receives are usually limited. By collecting donations or selling goods and services, the margin of income over expenses is used for the specific purpose that the non-profit was formed. It could be a community kitchen serving free food, a homeless shelter providing a place to sleep, a religious organization providing counseling, financial aid, medical support, etc.
4. Non-taxable activities
One benefit of being a non-profit organization is that the institute is exempted from many taxes. The fewer taxes you pay, the more surplus money you have for spending on your institute. Some activities on which a non-profit does not have to pay taxes include:
- activities where volunteers do the majority of the work
- activities carried on primarily for the benefit of members, students, patients, officers, or employees, for example, donating a hospital gift shop for patients or employees
- sales of merchandise that have been mostly donated to the non-profit, such as a thrift store
- the rental or exchange of mailing lists of donors or members
- the distribution of items worth less than $5 (nearly Rs.400) as incentives for donating money, such as stamps or pre-printed mailing labels
5. Related activities
Another way non-profits make money is by leveraging activities related to their mission. It not only allows the charity to do something good for a cause they support and believe in, but they can also earn money doing so. Non-profits can also sell products or services such as books, promotional items, apparel, or tickets to conferences and seminars. Setting up a paid training or workshop for individuals in the non-profit’s field can generate income.
So, for example, non-profit raising money for medical purposes or is affiliated with a hospital may set up medical seminars. People can volunteer or buy tickets to attend and hence generate revenue. A dance foundation may organize various dance programs and generate money by selling the tickets. However, a non-profit cannot distribute any of this income to the non-profit’s officers or directors.
6. Unrelated activities
There is also a way non-profits can earn money by engaging in activities unrelated to the purpose of the non-profit. While non-profits can usually earn unrelated business income without jeopardizing their non-profit status, they have to pay corporate income taxes on it, under state and federal corporate tax rules. However, this strategy could be risky if exploited. A non-profit should never let its unrelated business activities reach the point where it starts to look like a regular commercial business. It should avoid hiring excessive staff, avoid additional payments to staff and volunteer members, or produce more income than that generated by the organization’s exempt activities.
While taking part in any of the strategies above, it is always important not to forget the true purpose of non-profit organizations. They are set up to help those in need. The general public and philanthropists help raise money that ultimately runs the non-profits. It is essential to respect the time, money, and emotions of those involved and not treat their resources for anyone’s personal benefit.
If you want to learn more about non-profits, check here.