Eli5: How do non-profits make money & pay their employees? Recently saw a video on YouTube where this random dude working for a non-profit for homeless, earns upwards of $200k every year. Where’s the money flowing from? Besides donations of course.
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Non profits can still sell goods and services to make money. But if they don’t, then basically donations. People can make bank if run a successful non profit, like churches, since theres really no limit on employee pay or employee expenses. Wanna go on a free vacation overseas? Just write it off as a missionary trip.
A non-profit is still able to pay their employees and earn money, it’s just that if they earn extra money, they can’t give it to the owners as profit, but instead need to reinvest it into the non-profit, such as buying new equipment, or doing more of its charitable work, or just putting in savings.
Non-profits are allowed to have business expenses, such as paying their employees.
non-profit doesn’t mean they don’t make money. Non-profit means the money all goes back to the company instead of to shareholders and investors.
For an ELI5, non-profit organizations operates the “same” as a for-profit organization. The reason they’re called non-profit is that they don’t have “owners” and profits are not accrued or returned to these owners.
A non profit can do “business” (ie buy and sell stuff), employ people, have organization structures, salaries, bonuses, benefits and set up operations much like any other corporation. Any excess they obtain through donations or their operations (after costs) must be reinvested or held for the benefit of the non-profit.
This is a very simple overview and there are a number of other things related to tax, financial reporting, oversight etc specific to non-profits for them to qualify as non-profits (this is in context of the US but is generally true).
Any organisation or whatever can be non-profit. It just means that no dividend or profit can ever paid out from the organisations. The owners of the company can for example just take normal pay or salllary from their company (Im nott from USA, which has it’s special little things so I can’t speak for them).
Nonprofit means that all money made stays in the company. It can sell and do things for profit, just can’t pay profits out. So even if they gave millions of profit from last year, it’ll just stay in within the company’s control, the owners of the company can’t take it out for their personal use.
And yes, every now and then a rich person or corporation is caught abusing non-profits for tax reasons. Particularly popular with owning expensive art for example. Buy expensive art, give it to nonprofit, write the value off taxes, and still keep that art on your wall for small rental fee to the Nonprofit you control and save money in taxes overall. This Nonprofit then pays the money as wage to your son or friend. It works very well until you get caught, then you just pay your taxes correctly.
So in summary. Nonprofit can sell and get profit, just can’t pay it out. I myself buy art supplies from a nonprofit art collective (because they make brightest watercolours and blackest black pain in the world). Their prices for their special paints are bit cheaper because they don’t need to make profit, just cover the costs. They ask for a small voluntary payment during checkout for the running of the company, but you don’t have to; the prices are set to cover the cost of making that.
The difference between a non-profit organisation and a typical business comes down to who owns it and where the profits go.
With a typical business, the intention is that the business earns money for the owners and investors.
For a small scale example, I make a product, I sell it and I keep any profits I earn for myself.
With a non-profit, the intention is to provide a service, generally with charitable intentions. To do this most non-profits will to some degree operate as a form of business – they will make some form of income (from selling a service, donations, etc) which will then be used to pay for all of the business expenses (including paying wages to the staff working for them). The difference comes with what happens to any profits after expenses have been covered – rather than those being paid out to the owners and investors, they are put back into the business to allow them to continue providing their service, or to allow them to do more.
For a small scale example, I may make and sell a product for charity, the money I make on sales will be used to pay for my materials and time to make the product, and all of the profits left over will be donated to my chosen charity.
Non-profit is not non-earning. They can still charge for the work they do and/or get donations from their sponsors
When a non profit gets money weather from buying products or donations they put that money towards a budget. This budget includes the money they need to pay their employees, create whatever products they create, advertise however they advertise, pay bills etc etc. and then a little bit extra because most of this you can’t get 100% accurate. Once they cover all that they give all the rest of the money they make to whatever charity they support or put the rest of the money into things like getting better equipment or expanding the business.
Non-profit does not mean non-revenue. Many do mostly rely on donations but there are different ways to get donations, from simply asking, to holding fund raising events like walks or awards banquets, to reaching out to wealthy potential benefactors. But non-profits can also raise money from grants, from selling merchandise, or even selling services — look at places like a university, hospital, museum that could be pulling in many millions a year in tuition, medical bills, admission fees.
The main thing with a non-profit is that there aren’t shareholder and any leftover funds remains with the organization to further its cause… doing additional work toward the cause (more grants to fund cancer research, more toys for kids at Christmas) or save the funds for leaner years (donations go down in a recession, for example).
And workers at a non-profit can be paid well. They need to attract talent like any other job, and while some may give a “discount” because they believe in the cause, they still need competent people to effectively do jobs, and are limited by lack of stock options and such as additional compensation. They can’t expect a senior executive type to work for $50k if they’d make $250k at a for-profit company.
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