Many do not understand that nonprofit organizations do not have owners. I came to see how many did not understand this after last year I left the nonprofit, Financial Beginnings, I founded after 17 years of running it. I cannot believe how many are perplexed that I had no ownership stake in the organization I started and ran for such a long time. I kept getting asked how much I sold the organization for. Nonprofits cannot be sold because there are no owners. This common confusion led me to provide some clarification.
Why Don’t Nonprofits Have Owners?
Nonprofits are established to serve or benefit the community. Most nonprofits are tax-exempt, which means profits made by the nonprofit are not taxed. This leads to another common misconception, that nonprofits cannot operate at a profit. A nonprofit that is not operating at a profit is operating a very poor business model. Nonprofits can, and should, operate with a positive net income. Those profits then get funneled back into the organization to serve the mission.
In addition to profits of a nonprofit being tax-exempt, funds contributed to a nonprofit can be tax-deductible for the donor. The government is giving up opportunities for tax revenue for this community benefit. For-profit organizations, on the other hand, operate to benefit the ownership and the government is more than happy to siphon off of those profits.
So Why Go the Nonprofit Route Then?
Nonprofits are founded by individuals or groups who see a need in the community and want to wrap the community around filling this need. This isn’t to say a for-profit organization cannot serve the community. Many for-profit organizations have a community-minded focus, while still serving the interest of the owners. Over the last several years, benefit corporations have become a popular type of business formation. There are now 37 states that have the option to register a business as a benefit corporation. Benefit corporations aim to make a positive impact in the community in addition to making a profit.
A benefit corporation is a specific type of legal entity with statutory requirements, while B Corp certification is a voluntary, third-party certification for companies that meet certain social and environmental performance standards. A company can be both a benefit corporation and a B Corp, but being one does not necessarily mean it is the other.
Why I Chose the Nonprofit Route
When I first became interested in spreading financial literacy I considered working for a financial institution, creating a for-profit, and starting a nonprofit. Many organizations now have individuals or departments focused on financial education, but twenty years ago there were few. A for-profit would have provided me more income potential, but limited my ability to scale it. Ultimately, I felt financial literacy is a community issue and I felt a nonprofit was the best way to address it.
A nonprofit allowed the opportunity to receive contributed funds and more easily engage volunteers. The community also tended to receive a nonprofit better than a for profit. I was able to provide programming at no cost because I was able to receive contributed funds and had amazing volunteers.
Questions to Ask Yourself Before Founding a Nonprofit
What is the revenue source? Would you more easily be able to generate revenue with contributed funds?
Are you willing to have the organization overseen by a Board? Even if you founded and run a nonprofit, the ultimate control belongs to the Board of Directors.
Are you okay with being limited on your salary and it being publicly shared? An executive director’s salary is determined by the Board. Additionally, the executive director’s salary (as well as anyone who earns a salary over $100k) is publicly shared on the organization’s 990.
In Conclusion
Nonprofits are established to serve or benefit a community, not an individual. When deciding if a nonprofit organization is the best way to serve your mission or passion, carefully consider if it is a structure that you can live with long-term because ultimately you should want to create a movement that can live beyond its founder.
With a team of experts in nonprofit strategy, we're here to help you reach your full potential. Contact us today to start a conversation about how we can collaborate to enhance your nonprofit.
North Starr Consulting
Managing Director
Comments