Does Nonprofit Mean No Profit?
I have had a lot of people asking me why I am starting a nonprofit organization rather than a for-profit. The most common questions have something to do with how nonprofits stay in business, and more importantly, how I will pay my student loans, which are depressing to say the least. These are great questions, and ones I have definitely had to consider myself.
While everyone knows nonprofits exist, there are a lot of misconceptions about what they do and how they operate. The biggest misunderstanding is that “nonprofit” means “no profit”. To shed a little light on what a nonprofit actually is, here are a few differences between nonprofits and regular businesses from nonprofit.about.com:
- When you start a business, it is for the financial benefit of its owners and/or shareholders. Profit is the goal and the business pays taxes on that profit.
- A nonprofit entity has a mission that benefits the “greater good” of the community, society, or the world. It does not pay taxes, but it also cannot use its funds for anything other than the mission for which it was formed.
- Nonprofit organizations can and do make a profit, but it must be used solely for the operation of the organization or, in the case of a foundation, granted to other nonprofit organizations.
- When a for-profit organization goes out of business, its assets can be liquidated and the proceeds distributed to the owners or the shareholders. When a nonprofit goes out of business, its remaining assets must be given to another nonprofit.
There are many ways that nonprofits operate just like a regular corporation. For example, a nonprofit is also controlled by a board of directors. It is the board’s responsibility to ensure the nonprofit is fulfilling its mission, whether this is through direct action or supervision over an executive director.
Another important similarity is that nonprofits can, and commonly do, have paid employees. I won’t go into the politics of how much (or little) salaries should be, but they generally vary based on location, mission, and operating budget. For example, in an art nonprofit with an annual budget of $100,000, it would not be proper for a salary of $50,000/year. Also, while the major benefit of 501(c)(3) nonprofit status is that the company itself is not taxed on income, paid employees pay income taxes just like everybody else.
I know this is only a brief explanation, but I hope this helps clear up any confusions about how a nonprofit operates. My friends (and parents) can now rest assured that I am not signing up for a life of servitude without recourse. I don’t plan on becoming a millionaire through Project Create, but I certainly plan on being able to eat!