states exempt some nonprofits from paying state sales and use taxes. Check the laws in your state to see whether your organization is exempt from paying these taxes. The same is true of property taxes – it depends on your local jurisdiction. Your nearest tax assessor can tell you whether you have to pay property taxes.
Nonprofit employees must, of course, pay income tax on their salaries and other taxable compensation.
Nonprofits owning for-profits
Nonprofits can own for-profit businesses. We don’t recommend it, because you’re going to have enough on your plate, especially when you’re starting out, but it is possible. The business is subject to all regular taxes, just like all other for-profit businesses. Profits from the business may be distributed to the nonprofit, and the nonprofit must use them to further its goals and programs.
Very small organizations
If your nonprofit has less than $5,000 in annual revenues, it doesn’t need to apply for a tax exemption. You can even go a bit over $5,000 in a year if your average annual income over a three-year period is less than $5,000. When your income averages more than that amount, however, you have 90 days following the close of your most recent tax year to file for a tax exemption.
Nonprofit compensation
Nonprofit organizations have one common feature, regardless of their type: No board member, staff member, or other interested party can benefit from the earnings of a nonprofit. Instead, assets are forever dedicated to the purpose of the organization. If the organization dissolves, the nonprofit must transfer the assets to another organization that performs a similar function.
Comparing Nonprofits and For-Profits
Believing that nonprofit organizations have special advantages isn’t uncommon. And to some extent, it’s true. How many for-profit businesses, for example, get help from volunteers and generous donors? On the other hand, the advantages to owning your business exist, too. In this section, we discuss the similarities and differences between nonprofits and for-profits to help you decide which direction you should go.
How they’re alike
We start with the similarities between the nonprofits and for-profits because, believe it or not, there are several. For instance, consider the following:
❯❯ Sound business practices are important to both organizations.
❯❯ Strong financial oversight, including budgeting for revenue and expenses, is a key factor for both organizations.
❯❯ Good planning based on good information is a critical factor in the success of both nonprofits and for-profits.
❯❯ Management skills, the ability to communicate clearly, and attention to detail make a difference whether you’re working in a nonprofit or somewhere else.
❯❯ A little bit of luck doesn’t hurt either type of organization.
A final similarity involves the term entrepreneur, which usually describes someone who starts a new business. But any person or group that sets out to establish a nonprofit organization is entrepreneurial as well. After all, you’re starting out on a path that may lead to great success, and you’ll assume some risks along the way. We hope that you won’t risk your house or your savings account to get a nonprofit going, but you may have uncertain income for a while.
How they differ
Although for-profits and nonprofits require similar professionalism and dedication from their leaders, they differ when it comes time to interpret their bottom lines and successes.
Evaluating the success of a for-profit endeavor is easy: Did you make money, and, if so, how much did you make? We’re not saying this to cast stones at the capitalist system or to in any way disparage the millions of folks who work for profit-making endeavors. After all, the nonprofit sector depends on profits and wealth from the for-profit sector for its support. And of course, nonprofits have to balance the books, too. Even nonprofits prefer to end the year with more money than they had when they started. They just don’t call it profit; they call it a surplus.
For a nonprofit to be successful, it needs to change some aspect of the human condition; it needs to solve a problem, provide education, or build a monument. Because the goals of nonprofits are so lofty and progress toward achieving them is often slow, evaluating nonprofit success is sometimes difficult. See Chapter 8 for information about evaluating the results of your work.
Some states have passed legislation that allows for the formation of corporations that can earn and distribute profits to shareholders but also must pay attention to the social and public benefits of their business. Efforts to create these new corporate entities, which blend the best of the nonprofit and for-profit worlds, arise largely from the corporate social responsibility movement, which has grown substantially during the last 30 years.
You may have heard the term double bottom line, a concept that essentially means businesses should not only try to make profits but also work toward improving the social condition of their workers and customers and the environment in which they operate. To that end, many companies have corporate giving programs that support nonprofit organizations in their communities, as well as programs that encourage employees to volunteer for local charitable groups. In the case of the new hybrids, however, corporate responsibility isn’t optional; companies are obliged to consider the social impact of their activities and work toward making the world a better place.
The following three corporate models fall into the hybrid category. As such, they all have one thing in common: In the eyes of the IRS, they’re viewed as for-profit entities, and their income is taxable as in any for-profit business. That means if you wanted to make a donation to the work of a hybrid corporation, the IRS wouldn’t allow you to claim your contribution as a charitable gift.
• Low profit limited liability companies (L3Cs): The L3C model was designed to better attract capital investments from investors seeking a return on their money, as well as program-related investments (PRIs) from foundations. (PRIs are typically loans from foundations, not grants.) Foundations can count the funds used to provide PRIs toward their charitable-spending requirements as long as the charitable purpose of the project furthers the foundations’ charitable purposes.
