Can nonprofits make money?
The answer to this question is: Yes. While the name may suggest otherwise, nonprofits are allowed to make money. As stated earlier, money is an essential component that these organizations require to operate. The difference, however, is that they are not allowed to distribute the money they receive to private individuals. Furthermore, nonprofits have no shareholders. However, the distribution provision entails investors, directors, founders, and other stakeholders.
Like other businesses, nonprofits have costs and expenditures. For example, they must pay their employees a reasonable compensation while also fulfilling their obligations to contractors and others providing services. While nonprofits are allowed to make profits, they must channel it back to the activities of the organization.
Another difference between nonprofits and other organizations is that they are formed to serve the purpose approved by the government. The purpose is mostly to help society. As such, they are accorded a tax-exempt status and are held to high standards regarding income and expenditure accountability. To ensure regular income and the ability to fund activities without depending on sponsors all the time, nonprofits are often encouraged to find diverse sources of income and revenue. For example, you can sell labelled mechanize and account for all the sales by having a treasurer with accounting knowledge.
Limits of nonprofits to making money
Although you can be permitted to make money as a nonprofit, there are limits and rules that you need to adhere to. The limits are largely dependent on the type of income you receive. For instance, there are two main income categories as grouped by the IRS.
- Related Business income
The related business income is made by taking advantage of the activities related to a nonprofit's mission. The activities may include membership dues, grants meant for a specific purpose, revenues, fundraisers, raffles, registration for an online meeting or other income-generating activities related to the nonprofit's activities. An example of this is a gala. This is a big fundraising event that may include a dinner or a live auction and is hosted by foundations or other organizations. Donors can help here by creating awareness and supporting your activity.
- Unrelated business income (UBI)
UBI is derived from unrelated to the organization’s purposes. They can be divided into taxable UBI, which includes the sale of membership lists, sale of ad space on the organization’s website, endorsement revenue and income from fees received from a job search website. There is also non-taxable UBI which includes dividends and interest from investment accounts, rents from property and income from royalty.
As a leader of a nonprofit, you must identify the type of income and file them with IRS where necessary. Always know that too much UBI can adversely affect your nonprofit’s tax-exempt status. Therefore, use it sparingly.