how do you make money if it’s a non-profit organization?
In: Other
Non Profit: Money In = Money spent
For Profit: Money in > Money spent
That’s the super basic way of putting it.
Usually nonprofits are limited in how much they can pay their executive staff, I believe it’s typically 2% of revenue. So if you grow an organization large enough, you can make great money as an exec.
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Non-profits are great. A company can have a mission of making good quality shirts for example. They’d still pay the workers and executives competitive market rates for their work, so the people who actually contribute to generating revenue are properly compensated.
The only people who get shafted are would-be “investors” who wouldn’t have actually done anything other than expect a profit from their contribution.
The only downside is that starting companies usually requires capital, but I think that’s easily taken care of by rewarding bonuses to the owners/directors (who still are employed by the company) until they make back the money they initially contributed to start the company.
I ran a US nonprofit for about 3 decades. Most people have very wrong ideas about what that means. The legal difference between a for profit and and nonprofit is ownership. For profit companies are privately held or owned by stockholders. A nonprofit is not owned, but has a Board of Directors who are unpaid and voluntary.
The owners “own“ the profit in a for profit. Nonprofits have no technical “profits“. Any retained proceeds are called “net assets”. When I retired, my $35m company had about $5m in net assets.
You have to have retained earnings in order to do business. Often bills are paid before income is received. Banks have to approve of your financial ratios or they won’t lend you money for projects.
Worked in non profits for over a decade.
ELI5: Remember when you had a lemonade stand? At the end of the day you made $40. You buy more lemonade for the next day but you still have $20.
Instead of spending it on toys, you bought a nice chair for your lemonade stand. Or someone to sing a song about how great lemonade is.
Non ELI5: The “goal” of a nonprofit is to essentially get to zero, as everything is reinvested back in to the nonprofit. In practice nonprofits function pretty close to a business, but instead of shareholders you have “the mission” which is the reason for the nonprofit’s existence.
If a nonprofit is “too” successful this can create some problems… the recent NRA trial is a good example, where the executives enriched themselves for an inappropriate amount.
There’s quite a bit of “good enough” discussion of not-for-profit versus for-profit.
More relevant in the US is “501(c)(3) not-for-profit organization”. That’s the section of the internal revenue code that allows you to deduct your contributions to the organization from income.
If I see that you’re homeless and hungry, and buy you a meal and pay for a motel room, that’s nice and all, but it isn’t tax deductible. (Not all charitable expenses are deductible.) But if I contribute an equivalent amount of money to “Room at the Inn”, I can deduct it. (Because they’re a 501(c)(3) charitable institution.) They don’t pay income tax on that donation, so they can provide food and shelter for substantially less that “fair market cost”.
They will get in trouble if they don’t spend enough on their mission. Then they’ll lose their tax-exempt status and get hit for back taxes.
It doesn’t just apply to charitable organizations. The other big ones are religious and educational organizations.
This is specifically US-oriented. Things work differently in other countries. I know that “not-for-profit” (untaxed) entities exist, but I don’t know the mechanics. Some of them even have IRC 501(c)(3) status even though they would not be taxed in the US, so that their US contributors can deduct their donations. (All right, at least one, that counts as “some”.)
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