Although a nonprofit organisation differs from a business, as it’s not structured or designed to make money for its founders or members, much similar to a business, a Nonprofit Organization does make a profit in certain instances. The surplus made by a nonprofit organisation is usually exempted from tax treatments as the core values and aims of nonprofit organisations are to further social causes by providing sustainable solutions, support and aid to the public. Being transparent about profit allocation can help an organisation or charity in several ways by helping to connect with individuals looking to find charity work, attracting skilled employees for volunteer opportunities, along with donors and sponsors.
So how is profit used by a nonprofit organisation? Keep reading to find out.
How Do Nonprofit Organisations Make a Profit?
Profits made through related activities include money that is generated through contributions from nonprofit donors and volunteers, along with funds raised through charity auctions, dinners, raffles, etc.
- Nonprofit Donors
Well established nonprofit organisations tend to receive much of their funding from independent donors and volunteers. Therefore, charities and organisations need to spend time developing and maintaining good relationships existing donors while finding new donors to encourage consistent donations that will help run operations smoothly. Volunteers who are keen on finding charity work also tend to make generous contributions while lending their valuable time to help out.
- Grants from Governments and Corporations
Another common way to collect funding is through grants given by corporations and governments. Even though getting a grant approved may be a lengthy process that involves a lot of paperwork and time, many organisations think it’s a worthy effort as it provides much-needed money that can be used to run new programs and campaigns that help benefit people and communities in need.
This includes profits generated through means that are not directly linked to the organisation’s mission and vision. I.e. The nonprofit organisation has a vacant building that is only used seasonally to host charity events. Therefore, the space is rented to a local retailer during the off-season. The money generated through this is deemed as profit made through non-related activities. This will not be exempted from tax unless the profit made is a very small amount.
How Is Profit Used by a Nonprofit Organisation?
The tax exemptions granted by the government depend on whether the profit was generated through related or non-related means. While a small profit generated through non-related means doesn’t nullify the tax exemption, it’s a legal requirement that all profits made through related and non-related means are used for the betterment of the organisation’s cause and mission.
As profits made by a nonprofit cannot be used for personal benefit or be distributed amongst founders and directors, a large sum of the money generated is used to cover overheads and operational expenses such as rent, electricity and employee salaries. The remaining sum of money is used by the organisation to improve its services and functionalities in order to better help the communities and persons it has pledged to aid and support.