How Do Nonprofit Organizations Make Money?

Have you ever been asked to donate to an organization like United Way? Or seen a Salvation Army volunteer ringing a bell outside Macy’s during Christmas? If so, you probably know these are nonprofit organizations. But what does that mean exactly? How can an organization stay in business if not for profit?

In this article, I’ll introduce you to nonprofit organizations, how they operate, and how they sustain operations year after year.

What is a nonprofit organization?

As the name implies, a nonprofit is an organization that exists not-for-profit, but to accomplish a specific mission or fulfill a specific cause. Often, these missions are centered around humanitarian, educational, charitable or religious causes.

This differs from for-profit organizations whose main purpose is to generate revenue and earnings for the benefit of owners, investors, and shareholders. For publicly traded companies like Apple (AAPL), excess earnings are often returned to shareholders in the form of dividends and share buybacks. But nonprofits invest “excess” earnings back into the organization to support its mission.

Here are a few key characteristics of nonprofit organizations:

1. Mission-driven: Nonprofits address a specific social or community need, and center activities around advancing its mission and positively impacting society.
2. Non-distribution constraint: Nonprofits are prohibited from distributing profits or dividends to individuals or entities with a financial interest in the organization. Instead, surplus funds are reinvested back into the organization.
3. Tax-exempt: Nonprofits often seek tax-exempt status from the IRS, such as 501(c)(3) status in the United States. This allows it to receive tax benefits and provide tax deductions to donors.
4. Governance structure: Nonprofit organizations typically have a board of directors responsible for overseeing operations, ensuring compliance with regulations, and safeguarding its mission.
5. Funding: Nonprofits rely on a variety of funding sources, including donations from individuals, corporations, and foundations; grants from government agencies and charitable organizations; fundraising events; and earned income through fee-for-service programs, or social enterprises.

How do nonprofits make money?

It’s helpful to think about nonprofits as you would growth stocks, which are notorious for investing all earnings (if they have any) back into the business to generate more growth (i.e. revenue and income). Thus, there aren’t any earnings left over to distribute to shareholders. This is to benefit the company’s growth.

But with nonprofits, all profits are invested back into the organization for benefit of the mission. While a growth stock may one day mature into a stable, dividend-paying company. This will never be the case for a nonprofit. Excess earnings will always be invested back into the business.

Which begs the question, how do nonprofits make money? Here are a few of the most common ways:

1. Donations and Grants: Nonprofits rely heavily on donations from individuals, corporations, and foundations. Nonprofits also seek grants from government agencies and charitable foundations.
2. Membership Fees and Dues: Nonprofits often offer membership programs, where individuals or organizations become members by paying annual fees.
3. Fundraising Events: Nonprofits organize fundraising events such as galas, dinners, charity runs/walks, auctions, and raffles. These events create awareness about its cause but also generate revenue through ticket sales, sponsorships, and auction proceeds.
4. Fee-for-Service Programs: Nonprofits may provide services, programs, or workshops for which it charges fees. These services may include educational programs, consulting, training sessions, or specialized workshops.
5. Social Enterprises: Some nonprofits create social enterprises which are revenue-generating businesses aligned with its mission. These enterprises may include retail sales of products or services, crafts, restaurants, or other ventures that generate income while also advancing the organization’s mission.

To better illustrate how nonprofits make money, here a few real life examples.

Charitable Donations

I’m employed by a Fortune 150 company and one of the largest utilities in the US. Each year, the company holds a United Way campaign where employees donate to United Way. The company matches the amount raised by employees, which is typically in the hundreds of thousands, if not millions of dollars.

Executive leadership is very supportive of the giving campaign and highly encourages employees to participate. Though participation is voluntary.

I imagine most companies in the Fortune 500 sponsor similar campaigns to support nonprofit organizations. In fact, data shows that corporations donate over $20 billion to nonprofits each year while individuals donate over $325 billion.

Membership Fees

You’ve probably heard of the YMCA (Young Men’s Christian Association), which is a nonprofit organization supporting youth development and healthy living. The YMCA is most recognized for its youth sports programs and fitness facilities.

One of the ways the YMCA raises funds is through monthly membership fees. For example, the Frankfort, KY YMCA charges around $80 to $90 per month per household.

Social Enterprises

Goodwill Industries International is a well-known social enterprise. Goodwill is a nonprofit that sells donated inventory via its retail stores, and staffs its stores with individuals who have barriers to employment. It’s a service to employees, lower-income shoppers, and inventory donors.

In 2022, Goodwill’s revenue totaled $7.4 billion, with $1.1 billion in excess (or surplus) earnings.

Do nonprofits pay employees?

Many nonprofit organizations rely on volunteers to support its mission, but many also offer full-time employment. Like for-profit organizations, employees of nonprofits are paid. And nonprofit organizations rely on funding streams to meet its payroll obligations.

Because nonprofits rely heavily on donations and other forms of good-faith funding, salaries offered to employees is often lower than equivalent positions in the private sector. But those seeking employment at nonprofits are often motivated by the mission more than the money.

What are the tax benefits?

As a 501(c)(3) entity, nonprofit organizations are eligible to receive a number of tax benefits. These tend to differ by state and jurisdiction, but a few common tax benefits include:

1. Tax-Exempt Status: Nonprofits aren’t required to pay federal income taxes. But they are required to pay payroll taxes for employees.
2. Charitable Contributions Deduction: Donors to nonprofits can claim a charitable contributions deduction on their federal income tax, thereby reducing taxable income.
3. Property and Sales Tax Exemptions: Nonprofit organizations are often exempt from paying property taxes on owned real estate. Additionally, nonprofits may be eligible for sales tax exemptions on purchases made for its charitable activities.
4. Estate and Gift Tax Benefits: Nonprofits can receive charitable bequests and gifts through estate plans, and these donations are generally exempt from estate and gift taxes. Individuals who include nonprofits in their estate plans can help ensure their philanthropic goals are met while reducing estate tax liability.

What are the largest nonprofits in the US?

There are approximately 1.8 million nonprofit organizations in the US. These range in size from small, city-based organizations to those that are nationwide. A few of the largest organizations include:

1. United Way Worldwide: a global network of nonprofit organizations that focuses on community development and improving the lives of individuals and families.
2. YMCA (Young Men’s Christian Association): a nonprofit organization that promotes youth development, healthy living, and social responsibility. It operates numerous community centers, health and fitness facilities, and provides various programs and services.
3. American Red Cross: a humanitarian organization that provides emergency assistance, disaster relief, and support to those affected by natural disasters, conflicts, and health emergencies.
4. Salvation Army: an international Christian organization that provides a wide range of social services, including disaster relief, housing assistance, addiction recovery programs, and support for vulnerable populations.
5. Goodwill Industries International: an organization that operates thrift stores and provides job training and employment placement services for individuals facing barriers to employment.
6. Habitat for Humanity: dedicated to providing affordable housing and shelter to families in need. It mobilizes volunteers and community resources to build and renovate homes.

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