How do nonprofits work?

Posted by Terry Mosteller | May 28, 2021 | 0 Comments

What is a nonprofit? 

A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that operates as a business aiming to generate a profit for its owners.

Nonprofits do make money, but what they do with that money is part of what makes them different than a for-profit business. So what happens to the money? Instead of the profit being paid to investors, shareholders, or other owners,, nonprofits reinvest profits back into the organization to support their charitable activities. 

We will go through a general overview of how nonprofits work and then at the bottom, you will find some of the most common questions people usually have about a nonprofit for easy reference.

General Overview - How Nonprofits Work

Above you'll find a diagram of the steps to start a nonprofit, you can also find even more details about this process here. The heavy lifting doesn't end once you've followed the above steps and you've officially started your nonprofit, from there the real work begins. This is when you get to make real change and find ways to uphold your mission, vision, and impact on the world. Nonprofits can be structured in many different ways depending on management but for the most part, you have some core basics we can cover with some of the most frequently asked questions below. 

COMMON QUESTIONS:

How do nonprofits make money? 

Nonprofit charities generate revenue from donations, grants, memberships, and even service fees. 

How do you start a nonprofit? 

It's always important to look into the state regulations, as some states have different requirements. If you're looking for more information on starting a nonprofit in Kansas or Missouri, check out our article here. Generally speaking, however, the process involves filing Articles of Incorporation with your Secretary of State.

How do nonprofit business owners get paid? 

This is a question we are often asked. The first thing to note is that no one “owns” a nonprofit in the traditional sense. From a legal perspective, a nonprofit is viewed as being “owned” by the general public and serving the public interest. Secondly, nonprofit leaders can be paid a reasonable salary from their nonprofit. Nonprofit Founders and leaders often work tirelessly to build their organizations and accomplish their missions, and it is entirely valid for them to receive reasonable compensation for their efforts. 

Who are the key players in a nonprofit? 

Clients/Recipients of Services

Board 

Board Chair

Committees 

Executive Director/CEO

Staff 

Volunteers 

Donors

 How is a nonprofit typically structured? 

Typically a nonprofit is run by a Board of Directors (though this group is sometimes also referred to as a Board of Trustees or another similar term). The Board provides the primary high-level governance and oversight of the organization and is typically not involved in the day-to-day management of the nonprofit. 

Management of the organization is typically handled by the executives and senior staff of the nonprofit, such as the Executive Director/CEO, CFO, Vice Presidents, etc. These staff members run the organization on a day-to-day basis and Are the ones who actually execute the organization's mission as defined by the Board of Directors.

How do nonprofits raise money? 

Fundraising is one of a few ways you can raise money for your nonprofit. The board of directors and any nonprofit founder must engage in fundraising to meet the fiscal needs of their organization. There are a few basic sources of fundraising within the world of nonprofits. The first one is a grant. Grants can be given by government agencies, foundations, or corporations, usually to operate in a specific program. Grants typically require a report on program activities and expenditures at the end of the grant period but the money is usually provided upfront. In addition to grants, nonprofits can solicit individuals for funds as well. Individual donations may come from an organization's membership, neighborhood, or community. These are generally smaller donations, but still largely impactful to your mission as it gives an opportunity for others to be a part of it as well. Aside from smaller donations, sizable gifts may come from individuals who can be referred to as major donors. It is most common for nonprofits to also hold special events to raise dollars. A few typical examples of these types of events are galas, bake sales, and auctions. 

So does my nonprofit qualify for a 501(c)(3) tax-exempt status? 

Generally speaking, an organization that is organized and operated for purposes that serve the general public (such as charitable, educational, literary, religious, and scientific purposes), qualifies for 501(c)(3) status. For a deeper dive into this topic, visit our article here

What's the difference between nonprofit and tax-exempt? 

Although in everyday communication the two terms are often used interchangeably, their differences are important to know if you are involved in the nonprofit sector. You can find a summary of the distinctions between a nonprofit and a tax-exempt organization here

“Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it's the only thing that ever has.” 

-Margaret Mead 

 

If you're here, you're in the right place because you're doing the research necessary to get your nonprofit on the right track. One thing to caution though is that you can't do it all...the best leaders know when it's time to delegate or outsource to make sure you not only have the scalability and the credibility to make real change. 

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Do you have more questions or need additional assistance? Mission Counsel would love to help. We are a modern law firm seeking to end the access to justice gap faced by nonprofit organizations and to change the world by helping nonprofits navigate the unending legal and strategic questions they face by providing client-centered legal counsel focused on advancing our clients' missions. Click here to schedule a free 15-minute Mission Discovery Session with us.

About the Author

Terry Mosteller

Hi, I'm Terry Mosteller. I'm the founding attorney at Mission Counsel, where I help nonprofits and small and medium-sized businesses overcome obstacles so that they can focus on what they do best–accomplishing their mission. My goal is to get to know not just the legal challenges...

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