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Can Nonprofits Make a Profit?

Often it is important to answer this question for the attorney and the “mission-ary” volunteers of your nonprofit. The former is likely to become extremely concerned with Unrelated Business Income Tax (UBIT) issues, and the latter with the moral correctness of charging your customers a fee. The answer is simply, “Yes!” Nonprofits can make a profit, and they should!

Recognizing the important work of the nonprofit or “third sector” in American society, the United States Congress has provided for a special “tax-exempt” status for nonprofit organizations. Unlike the “for-profit” sector, the profits of a nonprofit (that is, funds left over after all expenses are paid) “shall not inure to the benefit of its directors.” Rather than the profits being disbursed to the stockholders, they are simply “reserved” to perform additional activities and programs consistent with the nonprofit’s mission. The funds reserved can be used to continue and improve existing programs, or initiate new ones. In a way, they are like venture capital, without which new businesses would fail precipitously.

According to a study conducted by the Independent Sector in the early 1980’s the average nonprofit had a three months cash reserve. At the end of the 20th century the average reserve was reduced to 30 days. For a variety of reasons (to address emergencies and invest in new technologies or programs), it is important for a nonprofit to have additional cash reserves.

Consistency with mission is key; the tax exemption granted to a nonprofit organization by the IRS relates directly to the purpose or the mission of the organization. This means, that income generated by any activities or “business” not in keeping with the nonprofit’s purpose as stated in the articles of incorporation, may be subject to income tax. This is called “Unrelated Business Income Tax (UBIT). For example, a nonprofit education and research organization may publish a periodic journal dealing with one more topics related to the mission of the organization. It “earns” revenue by selling subscriptions for its services. If, like many nonprofits, it also sells advertising space in the publication, those revenues may become subject to taxation. When the advertising has nothing to do with the organization’s mission, it is taxable. Paying taxes is not necessarily a bad thing, many nonprofits do. Still the National Center for Social Entrepreneurs suggests that most nonprofits are more successful with entrepreneurial activities that are consistent with their mission.

By Lynn Shelby Kickingbird in Growing Effective Boards
©Kickingbird Associates, 2003

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