There are several misconceptions about nonprofits.
The three biggest I have noticed are:
1. Nonprofits must be charities.
2. It is illegal or immoral for nonprofits to be profitable.
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3. Nonprofits have no need to innovate or be entrepreneurial.
Time to set this straight.
Yes, a nonprofit organization – particularly a 501c3 – must serve a public purpose to be granted tax exempt status from the IRS. This tax exemption is the government’s way of allowing people in a free market economy to choose which public purposes to support in lieu of raising taxes and then funding the same causes directly.
Nowhere in the tax code is a nonprofit forbidden from being profitable while executing its exempt purpose. The main distinction is that they cannot use charitable contributions for business activities outside of their exempt purpose, nor may they give a private benefit to contributors.
Bethany Lampland, chief operating officer at the New York Foundling charity, puts it this way: “Typically when we think about the ‘business’ of nonprofits, we think about volunteers donating their time and donors giving money.
“That may have been yesterday’s model, but today many forward-thinking nonprofits are diversifying their revenue streams and asserting greater control over their bottom lines. It is essential that nonprofits create their own opportunities for revenue, relying less on the generosity of others and more on good business strategies to support their missions.”
The focus on sustainability is the new direction where the nonprofit industry is heading. Many organizations are no longer comfortable leaving the entirety of their organization’s survival dependent on the next round of grant funding.
Funders have also changed the way they distribute funds and view nonprofits. With government grants becoming less stable, private foundations and donors are looking to ensure the long-term impact of their gifts.
Nonprofit leaders must move toward an entrepreneurial mindset while holding true to their organization’s defined mission.
As Cindy Miles, president of the Nonprofit Chamber of Service in Wichita, puts it, “I encourage nonprofits I work with to clearly define their mission and from there build a strong and comprehensive business plan. Today’s donors are looking for a clear and focused plan of implementation.”
Miles finds that some nonprofits struggle with this new way of thinking, and she often refers local nonprofit leaders to the same business planning resources serving for-profit tech startups.
Therefore, entrepreneurship isn’t just for tech startups. The reason for this is simple: Profitability equals sustainability, and to be continuously profitable, an organization must innovate and implement.
Who better to lead this charge than an entrepreneurial leader?
John Dascher is president and CEO of e2e Accelerator Inc. Contact him at jfd@e2eAccelerator.com.
Interested in writing for “Business Perspectives”? Contact Tom Shine at email@example.com or 316-268-6268.