Nonprofits Can’t Make a Profit myth

How do Not-For-Profit Businesses Work? Can Not-For-Profits Make a Profit?

It is a myth that nonprofits don’t or can’t make a profit. Not-for-profit businesses can make a profit; they just can’t distribute their profits to individuals beyond paying reasonable compensation.^[1][2][3]

The logic behind this rule against “private benefit” is due to tax exemptions that allow charitable nonprofits to become tax-exempt thus enabling them to operate with a lower overhead and skirt paying many, but in most cases not all, taxes. This is the same logic behind allowing a Church to operate as a non-profit.

Types of Non-Profits

Most tax-exempt non-profits, including religious institutions, have the tax status 501(c), but there are other tax-exempt organization types as well. The United States Internal Revenue Code (26 U.S.C. § 501(c)) provides 29 types of nonprofit organizations that are exempt from some federal income taxes; see a list of types of 501(c) organizations.^[4]

FACT: A 501(c)(3) organization is the most common of the 29 types of 501(c) non-profit organization in the United States, there are an additional 13 other types which cover everything from Day Care Centers, to Governmental entities, to everyone’s favorite Super PACs.

Rules for Tax-Exempt 501(c) Non-Profits

An organization must be recognized as a non-profit under IRS code section 501(c)(3) to be a tax-exempt non-profit. To keep the status, the non-profit must:^[5]

• Not to be organized or operate for the benefit of any private interests; NOTE: Not directly and overtly anyway.
• Not to devote a substantial part of its activities to attempting to influence legislation; NOTE: This rule barely applies. Consider, The American Legislative Exchange Council (ALEC) is a nonprofit organization.
• Not to participate or intervene in any political campaign on behalf of, or in opposition to, any candidate for public office. NOTE: This doesn’t seem to apply either since we have Super Pacs, ALEC, Clinton Foundation…
• Not to be organized for or conduct activities that are illegal or violate fundamental public policies. NOTE: Not directly and overtly anyway.

In other words, a non-profit isn’t going to be the same as a for-profit public company, but they care just as much about the bottom line as any other company, can reward their employees generously (within reason), and can most certainly make a profit while enjoying a tax-exempt status. This is perfect for businesses whose ends were non-profit anyway, like those who are trying to influence national and global policy.

TIP: Tax-exempt doesn’t mean the organization pays no tax, it means they are exempt from most federal income tax requirements and some state taxes (like sales tax in some states). Under Section 511, a 501(c) organization is subject to tax on its “unrelated business income,” whether or not the group makes a profit, but not including selling donated merchandise or other business or trade carried on by volunteers, or certain bingo games. Disposal of donated goods valued over $2,500, or acceptance of goods worth over $5,000 may also trigger special filing and record-keeping requirements.

TIP: Charities, non-profits, and philanthropic organizations are terms with different connotations. A philanthropic entity like the Clinton Foundation has little in common with a Charitable organization like Goodwill. A tax-exempt charity likewise isn’t the same as a non-tax-exempt non-profit.

FACT: As of 2014, there were about 1.4 million nonprofits in the U.S., and of those, about 1 million are public charities. Charity Navigator rates over 7,700 of them (which account for 50% of annual donations when excluding houses of worship). CEOs of “a more profitable non-profit” can make millions a year in compensation. This is true in healthcare, where it takes at least that much to lure the big players away from the for-profit sector. MANY people who operate for-profit businesses such as the Koch brothers, Icahn, and Soros participate in the private and public markets, in all sectors, directly and indirectly, both in charity and philanthropy. See TheStreet.com’s These 9 Nonprofit Executives Made Over $1-Million.

TIP: For more information, see National Council of Nonprofits and IRS guidance.

1. Myths About Nonprofits
2. 10 Myths About Non-Profit Work
3. Private Benefit
4. 501(c) Organization
5. Protect your nonprofit’s tax-exempt status