How Do Nonprofits Make Money?
A healthy basket of income sources pays off
Nonprofits do not exist to make money. Their goal is to make an impact. Nonprofit charities (also known as 501(c)(3) exempt organizations) organize activities that serve various purposes, such as charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, and preventing cruelty to children or animals.
The term “nonprofit” also tells us that these organizations don’t acquire profit in the traditional sense. But, of course, that doesn’t mean they don’t make money. They do need funds to provide their services, but that profit will not be sought for profit’s sake.
Charitable nonprofits (also known as public charities) generally receive money through donations, and also from grants from foundations or state and federal governments. They can also sell products or services. In fact, earned income from the sale of these products or services may make up more of a charity’s funding base than most people realize.
So, how do nonprofits make money, and what do they do with that money?
Nonprofit vs. For-Profit Income
First, it’s essential to understand what makes a nonprofit’s income different from a for-profit business. The difference is in the purpose of each organization. A for-profit generates revenue that benefits private interests such as the owner(s) of an organization or business, or its shareholders.
In contrast, the main goal of a nonprofit is to benefit the public. Nonprofits do not focus on the financial gain of any one person or group of people.
In addition, a public charity, such as the 501(c)(3), must derive a significant percentage of its income from the general public. Charities may do this in various ways, such as running fundraising campaigns throughout the year, receiving bequests through the estates of deceased supporters, applying for grants, and even holding events, such as galas or walkathons and races. A healthy charity develops a varied basket of income sources to fund its activities.
Also, most charitable nonprofits receive income from fees for services, tickets for performances, or from selling merchandise. Just think of a university that sells tickets to athletic events and artistic performances, charges tuition to students, and may have a medical center where patients and their insurance companies pay for medical services. Even small charities might run a thrift shop, while a well-established charity such as the Girl Scouts of the USA sells cookies.
When it comes to earned income, the IRS groups nonprofit earned income into two categories: related business income and unrelated business income. If your nonprofit is tax-exempt under a 501(c)(3) classification, most of the income you earn must be in line with your mission to avoid taxation.
Incorporated nonprofits are, essentially, businesses with a social mission. They can plan a business strategy for the organization and work to earn money, just like any business. However, they don’t earn money in the same way a for-profit company does. Instead, nonprofits make money by leveraging activities related to their mission. So, a nonprofit museum may set up a gift shop that sells art-related items to generate revenue, while a ballet company sells tickets to its performances to raise money for more lessons to aspiring dancers.
Nonprofit products or services offer an excellent way for nonprofits to make money as long as that activity is related to the organization’s charitable purpose. For instance, selling a product that is linked to a specific program can offset program costs, and potentially provide higher income streams. Nonprofits can sell products or services such as books, promotional items, apparel, or tickets to conferences and seminars. Setting up a paid training or workshop for individuals in the nonprofit’s field can also generate income.
Sometimes, nonprofits make money in ways that aren’t related to their nonprofit purposes. For most organizations, an activity is unrelated and subject to income tax if it meets three requirements:
- It is a trade or business
- It occurs regularly
- It is not related to the purpose of the organization
While nonprofits are sometimes allowed to earn unrelated income without losing their nonprofit status, they have to pay taxes (called UBIT) on it. Also, if a nonprofit makes too much income from unrelated activities, it may lose its tax-exempt status.
How Philanthropy Supports Charities
There are several ways charitable nonprofits receive support from philanthropic people or institutions. No charity can exist without this help. It fulfills their public support obligation and rounds out the income pie that nonprofits develop to support their missions.
Nonprofits receive much of their income through donations. These donations cover operational expenses and help nonprofits achieve their missions. Individual giving made up 68% of all charitable giving in 2018. Corporate and foundation giving are usually much smaller fractions of that philanthropic endeavor. That’s why charities may spend so much time developing a rapport with supporters and creating ways for individuals to interact with their organizations.
Such interactions can be significantly enhanced with a healthy volunteer program. Volunteers have proven to be some of the very best donors, and they tend to stick around for a long time.
To generate income from donations, nonprofits encourage individual donors to make one-time or recurring donations, to donate online, to attend events, or to consider planned giving. Some individual donors may be able to take a tax deduction for their donations.
Grants From Corporations, Foundations, and the Government
Another way nonprofits make money is through grants. Although grants can come from foundations, corporations, and state and federal governments, charitable nonprofits often seek grants from private foundations, Such grants usually fund a specific project for a limited time and involve a lengthy application process. However, they can be invaluable for nonprofits.
Grants are not usually the main source of income for charities, but they fill many needs, such as funding specific initiatives or helping to build capacity for the organization.
Some foundations may only give grants to 501(c)(3) charities.
Corporate funding can take many different forms. It may be a “one-time” relationship, where a company donates to a specific event or program. Nonprofits can also partner with corporations through cause-related marketing, sponsorships of events, by matching employee donations, and creating an employee volunteer program.
The Bottom Line
Too often, the term “nonprofit” is thought to mean “no income.” This could not be farther from the truth. Nonprofits have to make money if they want to grow, thrive, and continue serving the community. There are several types of nonprofits, according to the IRS, and depending on its type, a nonprofit may have different income streams than another.
Nonprofits make money in a variety of ways, and they often must seek multiple income mixes to do their work. Most money made by nonprofits is put back into the organization to keep it (and its programs) running to fulfill its societal purpose. Without this income, they wouldn’t be able to have the impact that they do.