Common misconceptions about Non-profit Organizations

Non-profits making money

Throughout my career, I've been surprised to confront recurring misconceptions about non-profit organizations (NPO). These are held by members of the public, board members, and even NPO staff members! I'd like to address these in a series of blog posts that will shed light on some of most common misunderstandings.

First and foremost is the mistaken idea that a non-profit organization can't earn a profit. I've even heard from folks who think 'true' NPOs run on volunteer workers, and aren't really non-profits if they are paying staff! It only takes a minute to clear this up by pointing to some of the mega NPOs, like the Red Cross, American Heart Association, and American Cancer Society. Each of these organizations has a large budget and legions of paid professional staff. Many NPOs maintain a healthy fund balance. The non-profit designation merely requires that any profits generated by the NPO are retained by the organization, rather than distributed to owners or shareholders, as would be the case with a for-profit organization. NPOs are not 'owned' by anyone; they are legal, mission-driven entities run by a board (usually volunteer) and a staff (usually compensated), who have particular legal responsibilities to the NPO when they are acting in that capacity.

To remain non-taxable under 501(c)(3) of the tax code, any revenue generated by an NPO must be related to the mission that qualified them for the (c)(3) designation. Otherwise, it may be subject to the unrelated business income tax (UBIT). When new revenue streams are contemplated, NPO leadership should always determine whether it will pass muster under the UBIT guidelines. If not, the organization may still decide to pursue that revenue opportunity, but should be prepared for the tax consequences.

One other salient feature of the NPO is the manner in which it is dissolved. Since the entity is not owned, it cannot be sold. So what happens to the remaining assets of the organization? By law, they must either be contributed to another, mission-consistent non-profit, or relinquished to the government.

In my next post, I'll address misconceptions about board composition.


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