Non-profit organizations are non-profit in one sense only. The term “non-profit” does not mean that the organization must show a financial loss each year. No organization can survive with a negative cash flow. Non-profit means that “no part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization.”1
A non-profit organization cannot be organized or operated for the financial advantage of the people who start it, their families, or the people who may put up capital to get things going. Neither are donors given a share in the organizations profits like stockholders would receive in a for-profit company. A non-profit is neither a means for gathering wealth nor avoid taxes. Non-profits are actually “for-profit” enterprises in just about every other sense.
- They must show a profit in that more money comes in than goes out.
- They must show a profit in that the organization’s endeavors must be approached on the basis of cost and return.
- They can show a profit in that the people who work for the organization may be paid a fair wage for their efforts.
- They are like “for-profit” organizations in that they are managed or at least overseen by boards who take their fiduciary responsibility seriously, looking for a sound return on the investment of their investors (the donors).
- They can accumulate reserve funds (capital) that can be carried over from year to year or invested in further ventures.
- They can operate businesses which in turn produce profits that can support the organization’s efforts (but not inure to the benefit of the organization’s founders).
Many up-start non-profits seem to think the gathering of reserve funds (profit) is somehow frowned upon and must be avoided. Many of those same people operate businesses at a loss because they think it is illegitimate to profit from their endeavors. But business is business and non-profits are enterprises that need sound business management. Non-profits do not distribute “profits” to individuals in the form of dividends or profit-sharing. That makes them non-profit. Operating at a loss does not make an organization non-profit. It makes them bankrupt and out of business.
For more information: