Philanthropy, Tips and Advice

Nonprofit Organizations are Businesses

Many people see nonprofits as a league of their own, with their own ways of operating and reaching their goals. While nonprofits have separate tax laws, the misconception that they are a separate business model is misleading. Nonprofit strategic plans are the same as a for profit business plan, outlining the goals for the organization and how they will implement the tools they have to reach those goals.

While nonprofits are focused on giving to others than to accumulate profit, they need funds to complete their mission, and so they have to be run in the same way as any for-profit business. Nonprofits are businesses, and need to be managed as such. We are here to clear up some common misconceptions about nonprofit organizations.

Nonprofits are all 501c3s

All 501c3 organizations are nonprofits, but not all nonprofits are 501c3s. In fact, there are 27 different types of legally recognized nonprofits. There are 501c6s, 501c13s, 501c19s, and many more. Within the commonly known category of 501c3s, there are public charities, private foundations and donor advised funds. Check out our resource page on different nonprofit organization structures to learn more about the different classifications of nonprofit.

Nonprofits Should Have Low Overhead and Volunteer Staff

Nonprofits have overhead costs, just like for profit businesses. To be successful, you have to have staff to assist with programming, development and fundraising, marketing, operations, legal and tax requirements and administrative duties, just to name a few. These staffers require salaries and benefits. Nonprofits that cannot offer competitive salaries and benefits are forced to lose qualified candidates to nonprofits or for profits that can.

Imagine someone running a for profit organization requires their staff to be volunteer and unpaid. How efficient do you think their organization would be run, given that their staff is squeezing in the work they need to do on the side of their paying jobs? The same goes for nonprofits. A successful nonprofit organization means that there is a team (whether big or small) that is dedicated and committed to spending their time every day to the growth of the organization.

Many nonprofits struggle with raising funds for overhead costs because it’s not as exciting or powerful of a story as contributing to the cause the nonprofit is supporting. Grants usually require funding to go towards programming and those in the community that the organization supports. But overhead costs are a vital part of running a nonprofit, just like it’s a vital part of running a for profit business.

You Have More Access to Money as a Nonprofit

We hear a lot of people express that they want to start a nonprofit because they get tax breaks and can access grant money. While can be true in some cases, there are many hoops you have to jump through before those tax breaks and grant money can pay off. Grant applications take a long time to complete and usually require a lot of detailed plans, goals and financial documents to be considered for funding. There are over 1.5 million nonprofits registered here in the US, all competing for grant dollars, so the competition is fierce.

To be tax exempt, you have to understand the tax laws of the city and state you are registering in, as well as federal tax exemption regulations. This requires a lot of paperwork and administrative time to ensure your nonprofit is compliant (and this work is continual!)

Nonprofits Get Most of their Funding from Foundations and Grants

Just like for profit businesses, nonprofits are most concerned with bringing in revenue. The difference is that these organizations need the revenue to offer a free service to those who need it. Nonprofits need to find other ways to fundraise and cover the costs of developing, promoting and implementing those services in the community.

For profit and nonprofit businesses all work hard to develop, promote and sell a great product or service. Nonprofit organizations’ point of sale is with individual donors, corporate partners and sponsors that believe in the benefits of the work they are doing. More than 70% of donations to nonprofits come from individuals, not foundation or government grants. And nonprofits may benefit from tax breaks, but at the end of the day, they still have plenty of expenses they need to cover.

Development professionals in the nonprofit world focus on creative ways to raise money for an organization. Similar to business development professionals in the corporate space, these individuals are networking with donors and potential donors, identifying grants and funding opportunities from applicable government organizations and non-government organizations, and coordinating events to raise money and awareness. Just like a for profit business, social media, email blasts and creative marketing campaigns are needed to bring attention to the services. Sponsorships and corporate partners are a great way for nonprofits to get funding as well.

Regardless of whether you are running a for profit or a nonprofit, you need to bring in money and eyeballs to continue to offer your services or products to the world. A successful nonprofit is managed and executed the same as a for profit business would be. To achieve maximum impact in the community, the nonprofit needs a staff, awareness and visibility, and a strategic plan that makes sense. A nonprofit is a business.

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