Can You Make Money from a Nonprofit? The Unvarnished Truth

The simple, albeit somewhat loaded, answer is yes, you can make money from a nonprofit. However, it’s crucial to understand how and for whom that money is being made. The key lies in the distinction between profit distribution and reasonable compensation. While a nonprofit cannot distribute its profits to individuals (like shareholders in a for-profit company), it absolutely can and should pay reasonable salaries and benefits to its employees, including its executives. Think of it this way: nonprofits exist to serve a mission, and talented people are needed to execute that mission effectively. Those people deserve to be paid fairly for their work. Let’s dive deeper into this nuanced landscape.

Understanding the Core Principles

The foundation of a nonprofit lies in its commitment to a public benefit. This means its primary goal isn’t to generate wealth for private individuals, but to address a social, environmental, or other charitable need. This purpose is what grants nonprofits their tax-exempt status. It also dictates the rules and regulations they must follow.

The Prohibition on Private Benefit (and Inurement)

At the heart of the matter is the legal concept of private benefit and inurement. Inurement refers to insiders (board members, executives, key employees) improperly benefiting from the nonprofit’s resources. Private benefit extends this prohibition to anyone who might gain an undue advantage from the organization’s operations. This doesn’t mean no one can benefit at all, but rather that the benefits must be incidental to the overall mission. For instance, a homeless shelter benefits the homeless, but that’s not considered private benefit in the legal sense – it’s the very purpose of its existence.

The Importance of Reasonable Compensation

While inurement is forbidden, reasonable compensation for services rendered is not only permissible, but expected. The IRS recognizes that running a nonprofit requires skilled professionals, and these professionals deserve fair market value for their contributions. What constitutes “reasonable” is determined by several factors, including:

• The size and complexity of the organization: A small, local nonprofit will likely have lower salary ranges than a large, national organization.
• The geographic location: Cost of living in a particular area significantly impacts salary expectations.
• The individual’s qualifications and experience: Someone with decades of experience in nonprofit management will command a higher salary than an entry-level employee.
• Comparable salaries in similar organizations: The nonprofit should benchmark its salaries against those offered by similar nonprofits in the same geographic area.

Transparency and Accountability

Nonprofits operate under a higher degree of transparency and accountability than for-profit businesses. Their financial information, including executive compensation, is often publicly available through IRS Form 990 filings. This increased scrutiny is designed to ensure that they are fulfilling their mission and using donor funds responsibly. Board members have a fiduciary duty to oversee the organization’s finances and ensure that all compensation decisions are fair and in line with the law.

Navigating the Grey Areas

Despite the clear guidelines, some grey areas can arise. Here are a few examples:

• Contractual Relationships: Nonprofits may engage independent contractors to provide specific services. While this is perfectly legitimate, it’s crucial to ensure that these relationships are arm’s length and that the contractors are being paid fair market value for their services. Avoid situations where insiders are using a related entity to profit unduly from the nonprofit.
• Related Party Transactions: Transactions between the nonprofit and individuals or entities related to insiders (e.g., board members, their family members, businesses they own) require careful scrutiny. These transactions must be at fair market value and fully disclosed.
• Fundraising Practices: While fundraising is essential for nonprofits, it’s vital to ensure that fundraising costs are reasonable and that a significant portion of the funds raised actually goes towards the mission. Excessive fundraising expenses can raise red flags with donors and regulators.

FAQs: Demystifying Nonprofit Finances

Let’s tackle some common questions about making money within the nonprofit sector.

1. Can a board member receive compensation from the nonprofit they serve?

Yes, a board member can receive compensation, but it’s heavily regulated. The compensation must be reasonable for services actually rendered, and the board member should recuse themselves from the vote on their own compensation. The board must document the justification for the compensation.

2. Is it illegal to start a nonprofit and pay yourself a salary?

No, it’s not inherently illegal, but it must be reasonable and justifiable. You can’t start a nonprofit solely to enrich yourself. The primary purpose must be charitable, and your salary must be commensurate with your role, experience, and the organization’s size and budget. Expect extra scrutiny.

3. What happens if a nonprofit is found to be engaging in inurement?

The consequences can be severe, ranging from financial penalties and loss of tax-exempt status to criminal charges. The IRS can impose excise taxes on the individuals who benefited improperly and on the organization itself.

4. How do nonprofits generate revenue?

Nonprofits rely on a variety of revenue streams, including donations, grants (from foundations and government agencies), earned income (fees for services, membership dues, product sales), and investment income.

5. Can a nonprofit own a for-profit subsidiary?

Yes, a nonprofit can own a for-profit subsidiary, but the primary purpose of the subsidiary must be to further the nonprofit’s mission. The profits generated by the subsidiary typically flow back to the nonprofit. This arrangement is often used to generate earned income.

6. Are there limits on executive compensation at nonprofits?

While there are no strict numerical limits, executive compensation must be reasonable and not excessive. The IRS scrutinizes executive compensation to ensure it’s in line with the organization’s mission and financial resources.

7. What is the Form 990, and why is it important?

The Form 990 is an annual information return that most tax-exempt organizations must file with the IRS. It provides detailed information about the organization’s finances, programs, and governance. It’s a crucial tool for transparency and accountability, as it’s publicly available.

8. Can a nonprofit invest its funds?

Yes, nonprofits can and often should invest their funds to generate income and ensure their long-term financial sustainability. However, these investments must be managed prudently and in accordance with the organization’s investment policy.

9. What is the difference between a 501(c)(3) and other types of nonprofits?

A 501(c)(3) is a specific type of nonprofit organization that is exempt from federal income tax because it is organized and operated for religious, charitable, scientific, literary, or educational purposes. Other types of nonprofits, such as 501(c)(4) (social welfare organizations) or 501(c)(6) (trade associations), have different purposes and different rules.

10. How can I report suspected wrongdoing at a nonprofit?

If you suspect financial mismanagement, inurement, or other wrongdoing at a nonprofit, you can report it to the IRS using Form 13909. You can also contact your state’s Attorney General or other relevant regulatory agencies.

11. Can a nonprofit lobby for legislation?

Yes, nonprofits can engage in lobbying activities, but there are limits on the amount of lobbying they can do. Excessive lobbying can jeopardize their tax-exempt status. 501(c)(3) organizations have stricter limits than 501(c)(4) organizations.

12. What are the best practices for ensuring financial integrity in a nonprofit?

Implementing strong internal controls is paramount. This includes having a robust budget process, regular audits, a conflict-of-interest policy, and a whistleblower policy. The board of directors must actively oversee the organization’s finances and ensure that it’s operating ethically and responsibly.

The Bottom Line

Making money from a nonprofit is possible and even necessary for some. Paying fair, competitive salaries attracts talented professionals committed to the organization’s mission and goals. The key is adherence to the law, best practices, and transparency so everyone can see that the organization is working towards its mission to benefit the public and not to privately benefit individuals inside the organization.

In conclusion, navigating the complexities of nonprofit finance requires a deep understanding of the legal and ethical considerations involved. By prioritizing transparency, accountability, and a commitment to the mission, nonprofits can ensure they are using their resources responsibly and effectively to achieve their goals.