Nonprofits are organizations established to support a beneficial cause, without the expectation of financial gain. Many believe they don’t make money because the work they do is related to charity, fundraising, and other philanthropic efforts, but this is not the case.
Nonprofits can and do generate income from multiple sources. They’re simply different from the ones used by for-profit organizations.
So, how do nonprofits make money? Let’s explore the matter by answering a few basic questions about nonprofits and how they operate.
Can Nonprofits Make Money?
Yes, nonprofits can make money, and it tends to be through donations from individuals, corporate sponsorships from businesses, grants from foundations, or government agencies.
Unlike for-profit businesses, a nonprofit makes money so it can support its philanthropic mission. The donations, sponsorships, and grants which make up the majority of a nonprofit’s income are put to use for operational costs, outreach programs, supplies required for operations, or any other activity related to carrying out the charity’s purpose.
In return for being a nonprofit, or federally described in section 501(c)(3), the organization enjoys several benefits, including the ability to receive tax-deductible contributions. But this is only as long as any additional money is reinvested back into the organization.
Other benefits of the nonprofit status are:
- Separate entity: A nonprofit corporation exists on its own. It can make contracts, sue people, and be sued in its own name. If someone breaks a contract made by the nonprofit, they may have to pay money.
- Perpetual existence: A nonprofit has the statutory right to exist in perpetuity. An informal organization does not benefit from that same luxury
- No dividend requirement: Nonprofit organizations don’t have to distribute profits to owners or shareholders.
- Limited liability protection or LLC status which means members and directors are not personally liable for the debts and liabilities of a nonprofit.
- Access to private or public grants, some of which may be specifically offered to 501(c)(3) organizations only. This not only makes it easier to get operating capital but also provides for the sustainability of a nonprofit’s mission.
All of the above-mentioned benefits contribute towards making it easier for nonprofits to get funding and money. Because, just like businesses, they too must earn to cover their annual expenses and maintain financial stability, which brings us to the next point – how nonprofits raise money.
How Nonprofits Make Money
Nonprofits earn money through donations, grants, earned income, and investments. Each of these income sources has its own set of rules and regulations, which must be followed in order to maintain the nonprofit’s tax-exempt status.
Additionally, nonprofits may earn money from membership fees or by selling items that were offered at fundraising events but were not collected.
Donations
Most nonprofits rely on the generosity of individuals and businesses who donate funds to support their cause. These gifts are typically reported as individual contributions by supporters of the cause and mission of the nonprofit and may be realised via:
- Events
- Online donations
- Stocks
- In-kind contributions
Grants
These may be awards coming from private corporations, community or family foundations, public charities or government agencies after the nonprofit has filed an application for it. These can be used to assist the nonprofit in achieving a certain goal. But they can also be used for programming, outreach activities, and more.
Note that grants often come with strings attached and whatever is written in the proposal must be realized in full.
Earned Income
If a nonprofit makes money on its own it means it’s sustainabile. And while it is true that donations and fundraising are essential for many nonprofits, these organizations also need to pay employees and get funding through self-generated funds. This may be anything, from membership fees to renting out a physical space, or charging a fee for a certain service.
By finding a way to earn its own income, nonprofits can contribute significantly to their budget and continue powering meaningful initiatives. The only catch in this scenario is that if the revenue is not earned in direct connection or relevance with the organization’s mission, it has to be reported differently as it may be liable to taxation.
Investments
Even though it’s not a way that is widely explored by nonprofits, opening a brokerage account just as an individual investor is an option for a nonprofit to make money. It’s a smart way for a nonprofit to grow and sustain its operation. Plus, thanks to its status. it may not even have to pay income tax.
Endowment, for example, is a type of investment account where the funds are invested and managed by an organization. The money is kept in the account until it reaches a certain level after which it can be used for programs or projects as agreed upon by the donors.
Do Nonprofits Make Money?
Yes, nonprofits make money and according to data, the annual revenue of these organizations in the US is $2.62 trillion. Estimates further show that the nonprofit sector has helped the US economy with an estimated $1.5 trillion.
At present, there are more than 1.5 million nonprofit organizations in the US which comprise 5.7% of the country’s GDP. More importantly, 10% of the US workforce works in the nonprofit sector.