How Do Nonprofits Earn Money?

Photo by Joel Muniz on Unsplash

A nonprofit organization is, essentially, an entity that plans events and activities to support various causes. The term “nonprofit” may lead you to think that the organizations don’t acquire money, but they do — just not in the traditional sense. This is where the line is drawn between nonprofit organizations and for-profit businesses. A for-profit generates revenue to support its founders, shareholders, and/or other private interests, whereas the goal of a nonprofit is to benefit the public in the field that the organization’s mission is targeted towards. 

A public charity (e.g., a 501(c)(3)) must obtain a certain amount of its income from the general public, usually through fundraisers, grants, and other charity events. Most charitable nonprofits also receive money from selling services and products, or through membership fees. Girl Scouts of the USA, a youth organization for girls in the US, demonstrates this by selling their infamous cookies through its chapters. In this regard, nonprofits act similarly to for-profits—but all expenses are deducted as operations, thus reducing the chance of being required to pay sales or federal taxes. Larger nonprofits also host events, and either charge for attendance or simply ask attendees for funding to support their mission. 

As mentioned, nonprofit organizations are tax exempt—meaning that they are able to exclude all or some of their income from federal and state government taxes. The organizations are divided into 12 activity groups, which are further separated into 24 subgroups. These include Culture and Recreation, Health, Environment, and more. To be classified into each group, specific conditions relating to the sector you are applying for must be met. The categories also correspond to a different section of the tax code. For this reason, organizations whose objectives cross into multiple fields have a harder time gaining nonprofit status. Luckily, there is a “not elsewhere classified” group created specifically for these nonprofit bodies. 

While it may seem like a nonprofit is restricted from getting revenue, it’s actually quite the opposite – the term “nonprofit” is simply a way to classify an organization and their purposes.