Nonprofit organizations and common misunderstandings
Nonprofits are organizations that exist between the private, for-profit world and government agencies that carry out important social, economic and political functions in our society.
June 27, 2013 - Author: Ann Chastain, Michigan State University Extension
A nonprofit is defined as a corporation or association that conducts business for the benefit of the general public, without shareholders and without a profit motive. Not-for-profit organizations have public ownership. They have governing boards, but cannot sell shares to others or personally benefit board members in any taxable way. In contrast, for-profit organizations can be privately owned and may re-distribute taxable wealth to employees and shareholders.
In many countries, nonprofits may apply for tax exempt status, so that the organization itself is exempt from income tax and other taxes. To be exempt from United States federal income taxes, the organization must meet the requirements set forth by the Internal Revenue Service.
Confusion often comes when the terms “nonprofit” and “profit” are used in the same sentence to describe aspects of the organization. Jan Masaoka, author of “The best of the board café, Hands-on solutions for nonprofit boards,” discusses common misunderstandings about nonprofit organizations:
- Nonprofits cannot make a profit.
They CAN earn a profit, more accurately called a surplus, but these earnings must be retained by the organization for continued operation, expansion and future plans. Earnings are not distributed to the membership.
- Nonprofits cannot charge for their services.
Many non-profits rely on user fees for operating capital. Non-profit pre-schools charge tuition, and the local opera house depends on ticket sales for performances due to decreased arts funding from the state.
- Nonprofits are poorly managed compared to for-profit businesses.
This is a complicated comparison, due to their profoundly different nature of business. Nonprofits often manage resources just as well or even better than for-profit companies of similar size, while being undercapitalized and highly regulated in all aspects. Nonprofits traditionally operate with high ethical standards, a trait sometimes missing in the for-profit sector.
- Nonprofits cannot lobby.
It is true that nonprofits cannot support or oppose individual political candidates; however, they certainly can support or oppose specific ballot proposals (such as for the public library millage or against Medicare reform.)
- A nonprofit budget has to be balanced.
Not true at all. There may be need for a cash balance at end the year that will be used to purchase an item in the next year. If the organization has no cash reserve, the funds could be needed for that account. In other years, the budget may show a deficit: to hire fund-raising staff, invest in a marketing plan, or purchase new equipment. The overall goal is to have working capital to allow programs to continue and make strategic purchasing decisions.
- Nonprofits only help needy people.
There are many nonprofit organizations that comprise the cornerstones of our communities. We may have children in 4-H youth programs, or the Scouts, or aging parents in a non-profit nursing home. We watch public television and listen to public radio, or take walks in restored and protected nature preserves. Medical research often stems from nonprofit research institutes, and our extraordinarily clean water may be impacted by nonprofit advocacy from local watershed councils. When we serve as volunteer nonprofit board members, we are giving back to our communities to help improve our overall quality of life.
- Nonprofits don’t contribute to the local economy.
According to the IRS, the total revenue of 501(c)3 public charities reporting in 2009 was $1.4 trillion, with total assets running at approximately $2.6 trillion. In addition, nonprofit institutions serving households make up 5.2% of our Gross Domestic Product or $751.2 billion in funds distributed. http://www.fas.org/sgp/crs/misc/R40919.pdf
- Nonprofit board members must have received services from the agency.
While many organizations designate some board seats for clients, there is typically a mix of community people on the board. Hearing the voice of someone who has used agency services is valuable for the board, in order to make critical adjustments to operating policy or organizational focus that may be missed from those who “think” they know what is best for clients.
The Michigan State University Extension Leadership and Community Engagement team offers training for improved effectiveness in several areas, including volunteer board development, meeting management, communicating through conflict and facilitation skills development, and organizational strategic visioning and planning. To contact an expert in your area, visit http://expert.msue.msu.edu/ or call 888-MSUE4MI (888-678-3464).