Can a nonprofit make money?
Yes, a nonprofit can make money. Nonprofits can make money AND net a profit. A nonprofit can re-invest profits into other avenues. Any nonprofit that net $0’s is fund balance or cash balance at the end has a major problem.
I want to make to caveats before I discuss the topic of nonprofit incomes and revenues. First, I understand nonprofit laws in the United States. First, nonprofit leaders in other countries will need to seek advice from their country’s laws and regulations. Second, when we talk about nonprofits making money, this post will exclude income from fundraising. Last, nonprofit organizations in the United States do have rules on how it makes money.
Disclaimers: I am not an accountant, nor a lawyer. Please seek further advice about the information written in this article. Seek professional advice about nonprofit business models.
Nonprofit Is A State Designation For Incorporation Purposes
Most people have the wrong idea about nonprofits. A business is granted nonprofit status based on the laws of the state. Nonprofits are a type of business entity with a different ownership and governance structure. Limited Liability Corporations are ran usually run by an owner or group of owners. Corporations have shareholders that are issue ownership percentages within a state. Corporations and Limited Liability Corporations can have various organizational structures and ownership.
A nonprofit is not owned by anyone. It is a public entity within the state. A board of directors has fiduciary responsibilities of the nonprofit organization. The board of directors must manage the nonprofit and hire a management team (Executive Director) to manage daily affairs.
Nonprofits do not have owners, but founders. Founders do not own the organization. No one “owns” a nonprofit organization. This concept of “ownership” does not exist for a nonprofit organization. Founders of a nonprofit should remove the word “owner” from their vocabulary when it comes to the nonprofit.
In a nonprofit, anyone can come in and “dethrone” the board of directors, founders, and executive leadership team through the court system. This would require investments into making this change happen, but it can happen. This is one reason you should ask yourself if a nonprofit business model is the best business model to achieve your goals. The same goals could achieved through a for-profit social enterprise instead.
The Concept of Public Dollars – No Owners
The financial model for a nonprofit is different than for-profit organizations. Nonprofits money usually comes from grants and donations, or “public dollars”. Stakeholders are the community, donors, clients, board members, and anyone who interacts with the nonprofit.
Nonprofits can make money, hold stock, bonds, own other businesses (including for-profit businesses), and similarly conduct business as for-profit businesses. Usually, when a nonprofit is incorporated, the state automatically grants tax-exempt status for the state. However, you need to understand what taxes the nonprofit is exempt from.
Tax-Exempt Status Adds Additional Laws To How Nonprofits Can Make Money
The 501(c)(3) is a federal tax designation that exempts a nonprofit from federal income taxes. Internal Revenue Rules (IRS) and laws clarify the amount of money that comes from public donations. Nonprofit leaders and board members need to understand the IRS laws concerning Unrelated Business Income Taxes. A nonprofit can make money that sustains the organization. However, the board of directors needs to know what will cause the nonprofit to pay corporate taxes.
Nonprofits can have eCommerce stores, have management of other business ventures, and operate like a for-profit business. The IRS has Internal Revenue Codes and Internal Revenue Bulletins to help nonprofit leaders understand guidance on income streams. Some IRC and IRB go into how nonprofits should handle sponsorship, retail stores, baking fundraisers, auctions, and even Bingo.
The Climate Of Change For Nonprofits
As of this writing nonprofits, are in a difficult economic time. Most are trying to find sustainable business models that will let them achieve their obligations and meet their mission. I advocate for nonprofits to find other sources of revenue beyond grants, loans, and donations. Everyone pushes these statistics that say how much money is available for fundraising.
What most of the numbers don’t clarify is the money being locked away in donor-advised funds, trust funds, and foundations. Many of the reports don’t explain that a majority of the money also includes church tides and donations. So when you look at the pie charts, the money available to non-religious nonprofits represents a smaller fraction of the total money available.
Grant dollars and donations are harder to get for new nonprofits. The nonprofit and its leaders must prove the mission and business model work. Nonprofit leaders need to have a long-term sustainable plan to grow and achieve their mission.
How Nonprofits Can Make Money That Does Not Jeopardize It’s 501(c)(3)
Nonprofits have many ways beyond grants and donations to make money. Nonprofits can add sponsorship, create unique events, build eCommerce platforms, sell services, and create for-profit businesses that sustain the nonprofit.
The Green Bay Packers is owned by a nonprofit organization. It’s a nonprofit that makes money but also does public good for its community. In turn, it has major support within the city, no matter if they win a championship or not. NFL teams ownership is a multi-billion dollar industry. The team has a pay-it-forward model for other nonprofits. In 2020, it was estimated that nonprofits in Green Bay would lose over 2 million dollars because Green Bay Packers did not play – due to the pandemic. Nonprofits used volunteers to run concession stands at games and netted a profit from sales of the concessions. I would love to take time to dissect Green Bay Packer’s business model, but that requires more research.
Another example of a nonprofit is Ikea, which can never be sold! According to FastCompany, Ikea’s ownership structure breaks down to the following:
- Ikea Group operates 290 stores across the world.
- Ikea Group is owned by Ingka Holding.
- But Ingka Holding is owned by the nonprofit Stichting Ingka Foundation.
- Ingka Holding does not hold the trademarks, copyrights to Ikea. Those are held by a private corporation. Ikea must pay the private company for rights to use trademarks.
That’s why its business model works. However, Ikea’s business structure was created to prevent a family feud when the original owner died. The nonprofit has clear rules on how it should be run. Read the full article written by FastCompany. There are several issues with this type of nonprofit business model. But if employed ethically, could net a nonprofit major sustainable cash flow.
If you have other examples, please share them with me! I would love to add them to this article.
Nonprofit Finances When It Comes To Making Money
Nonprofits need a board that has been educated on good accounting practices, healthy financial models, and sound business practices. Oftentimes, when these three things are ignored, the nonprofit organization cannot grow or has a very unsustainable business model.
Board members must also understand their obligations to the organization. Most boards don’t do strategic planning, which includes financial planning to understand how the nonprofit can create revenues beyond fundraising.
Good Account Practices Before Making Money
A nonprofit’s accounting practices can get tricky very quickly. The first challenge in understanding how a nonprofit can make money starts with good accounting practices. Nonprofit financial documents such as the 990s are a struggle for smaller nonprofits. Add audits and it can be almost impossible.
Nonprofits who want to extend their financial models with other income streams must streamline accounting practices. Accounting for donations, sponsorship, donations, and taxable income can get difficult. The more complex the nonprofit, the more complex the nonprofit’s taxes are. Accounts payable and accounts receivable will be important. Use accounting software to manage income sources (grants, donations, eCommerce, services, etc) and expenses.
If the nonprofit decides to venture into business ventures that have nothing to do with the nonprofit be ready to pay the full corporate rate of 30% on all net income. A nonprofit that has an eCommerce store, must now account for inventory, revenues, expenditures, and possibly related unrelated business income taxes. You need to have the best account practices for the nonprofit. If the nonprofit has bad accounting practices, don’t move to other money-making ventures until it’s ready.
Financial Models Should Come From The Board of Directors
Operating a for-profit business is difficult. But operating and managing a nonprofit can seem like an uphill battle on ice. It can seem impossible, but if the executive leadership team and board have the right equipment, then it knows how to navigate financial challenges. The board of directors is in the position to decide what the nonprofit’s financial model should be.
The board can find new financial opportunities for the nonprofits. The strongest nonprofit understand this concept and elect board members who can help with the financial challenges.
Many nonprofits lost money when they invested in Bernie Madoff’s Ponzi scheme. Nonprofits did not want to acknowledge being a part of the scheme and losing money. It was reported that some of the nonprofits invest all of the organization’s money and were forced to close when the scheme came to light.
In this case board members wanted to make fast money for the nonprofit and invest heavily into something that was appeared to have a high net of return. Board members need to scrutinize financial investments and be ready to ask questions and challenge stocks as a way to invest cash as a long-term financial model.
Financial Growth Models For Nonprofits
I am not an expert in financial growth models or economics. Most people who start nonprofits are not either. People in these fields avoid starting nonprofits because of the inherently bad investment risk associated with the nonprofit business model and structure. The failure rate of nonprofits is higher than small businesses.
The board cannot be lazy and lax about its approach to generating income for the nonprofit. Get a board member(s) who understands financial growth models and economics – people who understand investing and money. If your board is weak in fundraising and creating a long-term financial model for the nonprofit, hire a consultant, educate the board, or find new board members.
It will be too late when the net operating budget is $0, funding has dried up, and the nonprofit is operating at a loss or has no fund balance to work with. At that point, the nonprofit’s business and financial models were unsustainable. It may be time to close the doors.
Most nonprofits’ financial models are structured around grants and donations. Any nonprofit that is reliant on one sole funder is bound to fail. It’s important to have a diversity of income for a nonprofit organization.
Nonprofits Need Sound Business Practices To Make Money
Nonprofit founders must understand that the money the nonprofit makes is not the founder’s profit. Executive leadership can have salaries are by industry best practices. Establishing business practices before any incorporation paperwork is filed starts the nonprofit in a good direction.
Accountability has to be factored into a nonprofit’s financial structure when it comes to making money. A nonprofit founder that has a salary at the nonprofit’s revenue, doesn’t look good to a grant-maker. When it comes to tax-exempt nonprofits making money, the Internal Revenue Service does not look well upon an organization where the founder takes all the income from a nonprofit.
This subjects the founder, the board, and the nonprofit to not only Unrelated Business Income Taxes but inurement. Even if board members get no money or income from these business ventures, if it allows executive leadership to have excessive incomes, all parties can become legally liable. In such cases, the IRS will fine ALL guilty parties. The IRS can even revoke the nonprofit tax-exempt status.
Internal Departments – Structure Matters
The internal departmental structure of a nonprofit has to be the biggest red flag of a properly run nonprofit organization. Human resources, ethics, and day to operations are just a few sound business practices. You have a separate accounting department with two functions (accounts receivable, accounts payable). The nonprofit has a human resources manager to handle hiring, firing and employees. The nonprofit has a volunteer manager (team), a development department, an internal marketing department, executive leadership teams to handle all programs and services.
An organizational chart will give you insight into how the nonprofit is run. Grant-making organizations typically want the organizational chart to understand how the nonprofit is run. Lack of a proper business structure means that the nonprofit is not ready to move forward with other external business ventures.
Test Questions To Determine If Your Nonprofit Has A Sound Business Structure
- Are you managing the nonprofit like a business? The question sounds stupid but is very valid.
- Does the nonprofit have an organizational chart AND a list of board members with credentials?
- Are you treating the nonprofit like it’s a part-time job or a hobby?
- How many hours per week do you put into growing the nonprofit?
- Is the nonprofit 100% volunteer managed and run?
- Does the organization have accounting practices written down? Does the nonprofit have a separate checking account?
- Does it comply with all the laws within its jurisdiction?
- Does the organization have a 5,10,20 year strategic plan?
The Business Model -Retail Store For Nonprofits. Can a retail store be a nonprofit?
Nonprofits can own a retail store. However, the type of store does matter. Most nonprofit retail stores are operated by museums as gift shops. The other structure for the “retail model” for nonprofits is used clothing stores or used resale stores.
For nonprofits, the way the retail store operates will be important. Goodwill and Salvation Army operate two of the most well-known retail stores. The financial models closely align with both nonprofits’ missions. 100% of the net revenues support both organizations.
A nonprofit that has a retail store and sells new resale items have a high probability of being subject to Unrelated Business Income Taxes, increase public scrutiny, and being watched by the IRS.
Can The Nonprofit Sell X but our mission is A and has nothing to do with product X?
If product X is wholly unrelated to the organization’s mission, it is subject to Unrelated Business Income Taxes. The nonprofit also takes on additional legal liabilities in selling product X. The product must meet all legal laws to be sold. A nonprofit in Detriot lost its nonprofit status and its founder was charged with several crimes employing this business model.
What is cryptocurrency and how should nonprofits treat donations from crypto-currency. How NOT to diversify nonprofit income streams.
Diversifying funding for a nonprofit organization has to be planned and given time to develop. Alternative revenue streams don’t happen overnight. Here’s a story to wrap around your brain about making sure things are legal. The Geek Group Inc was founded in 1994 and shuttered its doors in 2018. The nonprofit was located in Grand Rapids, Michigan.
The 990s showed irregularities in the 2016 filing. The mission statement was to provide access to science, technology, engineering, and math for teachers, individuals, and schools. Geek Group offered a robotics lab, computer lab, laser lab, rapid prototype lab, audio/visual lab, and machine shop.
On December 21, 2018, The Greek Group, a tax-exempt nonprofit was raided by Homeland Security and The National Science Institute. It was alleged that the founder, Christopher Boden, ran a money-laundering operation that exchanged drug dealers’ dirty cash for bitcoin.
He admitted to prosecutors that the nonprofit had struggled for years to make the mission viable, but struggled with fundraising and a solid profit model. The nonprofit was officially lost its tax-exempt status in May of 2021 after failing to file three years of tax-exempt IRS returns.
Can the board members be held liable for the President or Executive Leadership teams actions?
The 990s listed 7 board members at the time of filing in 2016. Any board member knowingly or unknowingly can be held responsible for the illegal wrongdoings of a nonprofit organization. Board members can be charged with the same crimes. Board members could also face additional penalties from the Internal Revenue Services. Al Capone did not go down for murder, he went down for tax evasion.
The same rule applies to nonprofit board members. Board members must understand where the nonprofit’s finances stand and all revenue and income streams derive. Board members in the Geek Group case were negligible at a minimum. This particular nonprofit founder was arrested for fraud and money laundering. Just because something seems like a great idea for additional income, it may not mean it’s legal.
What are the issues that caused the nonprofit to fold?
In 2016 the nonprofit employed 13 employees and reported about $500,000 in employee expenses. On average, employees made $38,000 per year. Some of the most expensive expenditures for the nonprofit included occupancy of $120,000 per year and insurance at $18,000.
The reason nonprofits should not hide 990s is to let people see what their expenditures are. If people understand that nonprofits are a type of business structure, then a mental shift will occur with how nonprofits can fundraise. The entity has expenses just like any other business.
In 2014, the nonprofit reported $713,243 in contributions with expenses reported at $248,168. In 2015, the contributions were reported as $1, 074,186. The founder and board members admitted that the business model did not work and the nonprofit had financial problems for years. The organization was not able to grow its fundraising or find alternative income streams. Was the nonprofit limited by the board, grants, or just its mission? That’s not a question that I can answer without further analysis of The Greek Group’s operations and fundraising models. The analysis would include a review of unrestricted assets, net income, expenditures, and other information on a year-by-year basis.
What did the founder of the nonprofit do that was illegal?
Boden pleaded guilty to operating an unlicensed money-transmitting business, money laundering, and structuring deposits to evade financial institution reporting requirements. He probably faced more serious charges that were probably pleaded down to lesser charges in a plea deal.
Cryptocurrency exchanges are not illegal. Operating and trading cryptocurrency is not illegal. But how the founder and employees handled the exchanges was illegal. The organization and the founder did not have a license to operate a money exchange in the state of Michigan. If you plan to operate a money-making venture on behalf of a nonprofit, research to learn what’s required and how it can risk a nonprofit’s 501(c)(3).
Had the board of directors and founders of The Greek Group done their due diligence, consulted attorneys, and understood the laws, then the nonprofit could have POSSIBLY had a secure alternate stream of income. The nonprofit could have created a separate for-profit business structure 100% owned by the nonprofit organization. A business structure of this magnitude would require consultation with lawyers and accountants!
As mentioned earlier, three things were missing from the nonprofit’s overall ability to find sustainable alternative revenue income streams for nonprofit:
- Good Accounting Practices. If the nonprofit’s board of directors met regularly to review the account, the income irregularities would have been blatant. A good accountant can help a nonprofit navigate and understand how to use assets and liabilities to generate income. A good attorney can help the nonprofit’s board of directors and leadership team learn the legal liabilities and keep the board and leadership safe.
- Strong Financial Model. I will keep harking on the board of directors because guidance should come from the top. Board members should now allow any financial models that will harm the organization. The board should have had documented the methods to finance the organization (loans, donations, fundraising, partnership agreements, contracts, etc). Each of these finance models has legal liabilities and it’s up to the board of directors to determine the amount of risk a nonprofit is willing to accept with each finance model.
- Sound Business Practices. The executive director (as the founder) has too much lee-way in making important business decisions for the organization. Founder syndrome is a real thing. I am not sure about the organizational structure and how decisions were approved. But, employees were involved and that means that everyone within the organization knew about the cryptocurrency exchanges. Founders (if they remain in an executive leadership position with the nonprofit) must understand their legal responsibility to the organization and treat nonprofits as a business. Nonprofit boards, executive leadership (executive directors and certain staff), have fiduciary liability and responsibility for a nonprofit WITHOUT actual ownership of the nonprofit (a nonprofit is not OWNED by anyone. Nonprofits are a self-standing business structure).
Conclusion
It’s important to understand all the things that go into making money for a nonprofit. The board and the organizational structure should be set up to handle extra financial responsibilities. Public scrutiny abounds into how nonprofits make money. The Girl Scouts model does not cause friction, because the mission of the organization is to teach and exemplify entrepreneurial skills for girls. Licensing its products and name to various brands created a healthy financial model for the Girl Scouts. Nonprofits can implement the Girl’s Scout Financial Model. The nonprofit needs a clear understanding of how the money will help the organization’s long-term sustainability and viability. If the board cannot explain it, it probably then seeking additional ways for the nonprofit to make money, need to be set aside for strategic planning.
