Nonprofit Myths: #6 - No Profit for Nonprofits?

Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.

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Myth: Nonprofits are not allowed to make a profit from their activities.

Truth: Of course they can! A nonprofit is still a business. A business can’t stay in business very long if it does not take in more than it spends.  Nonprofits generate revenues from a variety of sources. According to the National Center for Charitable Statistics, about 50% of nonprofit revenues come from fees for goods and services—they sell stuff to people.  Another 30 percent comes from governments that also buy services. The rest comes from grants and donations. For an individual tax-exempt nonprofit, the revenues need to cover all costs and hopefully leave a surplus (a “profit”) to allow for a balance from year to year. Nonprofits can and should try to earn this kind of surplus.  If they don’t generate revenue above expenses, they will struggle to exist or to expand in the future.

Nonprofit organizations can make a profit; the key difference is that a nonprofit’s surplus belong to the organization for use to benefit the charitable mission, not any individual unless those individuals are part of their target mission. A nonprofit can buy a new pair of shoes for an orphan, but not a new pair of shoes for the board president.

Moral of this Myth: Plan for and expect to have excess revenue over expenses. The alternative (to consistently take in less than you spend) paves the way for collapse.

 

Myth: I am going to set up my nonprofit as a limited liability company (LLC).

Truth: First, some definitions. A limited liability company means that the business is separate from the owner. The IRS calls it a “pass-through entity,” which means that profits and losses go through the company directly to the owner. A handful of states allow nonprofits to register as LLCs. The IRS will allow an LLC to file for 501(c) (3) tax-exempt status, but the process and the paperwork are rigorous and complicated.  Why? Because an LLC is a for-profit entity, and a nonprofit is a not-for-profit entity. The two do not mix. The only exception is if every member of the LLC is a nonprofit organization.

Moral of this Myth: It’s almost always better to choose corporation status to create a nonprofit organization. There are fewer headaches, more protection for board members against personal liability, and no IRS snarls for filing the wrong entity. And when it comes to seeking grants from foundations, LLC status is often a major roadblock. For all these reasons, setting up a nonprofit as an LLC is a very limited option.

 

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"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission

 

For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?

 

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