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Profit and Non Profit Business

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Sections of This Topic IncludeSuggested Previous ReadingWhat is a Nonprofit?Key RolesThree Major Sections of Personnel in a NonprofitManagement Skills Generally Unique to NonprofitsCurrent Major Challenge: DevolutionRevenue: Fees and FundraisingUnique Nature and Struggles of Traditional Small NonprofitsGeneral ResourcesAdditional Perspectives on Nonprofit Organizations
Also See the Library's Blogs Related to Nonprofit OrganizationsIn addition to the articles on this current page, see the following blogs which have posts related to Nonprofit Organizations. Scan down the blog's page to see various posts. Also see the section "Recent Blog Posts" in the sidebar of the blog or click on "next" near the bottom of a post in the blog.
Library's Consulting and Organizational Development BlogLibrary's Leadership BlogLibrary's Nonprofit Capacity Building BlogLibrary's Supervision Blog
Also seeRelated Library Topics

Suggested Previous ReadingNote that the reader might best be served to first read the document Introduction to Organizations to understand the overall general nature of all organizations. As noted in that document, today's leaders are faced with continual change in their organizations. Consequently, today's leaders should have a strong sense of what their organizations are about. This document will accomplish that for nonprofit leaders. An organization is a collection of resources arranged to accomplish an overall goal. The purpose of a nonprofit organization is to meet one or more needs in a community. Each nonprofit describes its overall purpose in a mission statement. (Very simply put, the word "nonprofit" means an organization that does not distribute a profit.) Typical types of nonprofit services are advocacy, arts, civic, cultural, education, health and human service. Nonprofits range in size from extremely large (e.g., Red Cross, large hospitals, etc.) to extremely small (e.g., organizations that have no full-time personnel, and operate only with volunteers).
What is a "Nonprofit"?Some Basics ...(by Carter McNamara)Before you start your nonprofit, it's helpful to realize that the phrase "starting a nonprofit" can mean many things. Read the following very basic information to begin thinking about what you mean when you set out to "start a nonprofit".
- You can be a nonprofit organization just by getting together with some friends, eg, to form a self-help group. In this case, you’re an informal nonprofit organization.
- Consider incorporating your nonprofit so it exists as a separate legal organization in order to a) own its own property and its own bank account; b) ensure that the nonprofit can continue on its own (even after you’re gone); and c) protect yourself personally for operations of the nonprofit. You incorporate your nonprofit by filing articles of incorporation with the appropriate local state office. (An incorporated nonprofit requires a board of directors.)
- If you want to be exempt from federal taxes (and maybe some other taxes, too), you should file with the IRS to be a tax-exempt organization. (The IRS states that you must be a corporation, community chest, fund, or foundation to receive tax-exempt status. Articles of association may also be used in place of incorporation.) (Probably the most well known type of nonprofits is a the IRS classification of 501(c)(3), a “charitable nonprofit’.)
- Depending on the nature of your organization, you may also granted tax-deductible status from the IRS. Publication 526 lists the types of organizations to which donations are deductible.
- So, if you did all of these steps, you’d be an incorporated, tax-exempt nonprofit that could receive tax deductible donations.
- The particular steps you take depend on your plans for your organization, including the nature of its services. They also depend on how the IRS interprets the nature of your organization, including its services.
And Now Some Refinement on the Description of "Nonprofit"(by Putnam Barber)(Items in brackets "[!]" are added by Carter McNamara.)The word "nonprofit" refers to a type of business -- one which is organized under rules that forbid the distribution of profits to owners. "Profit" in this context is a relatively technical accounting term, related to but not identical with the notion of a surplus of revenues over expenditures.
Most [registered!] nonprofits businesses are organized into corporations [or associations!]. Most corporations are formed under the corporations laws of a particular state. Every state has provisions for forming nonprofit corporations; some permit other forms, such as unincorporated associations, trusts, etc., which may operate as nonprofit businesses on slightly (but sometimes importantly) different terms.
The Internal Revenue Service (IRS) gets involved because corporations are, in general, required to pay federal corporate income taxes on their net earning (another technical term, pointing to a slightly different way to the idea of a surplus of revenue over expenses).
Section 501 of the Internal Revenue Code lists several circumstances under which corporations [or unincorporated nonprofits!] are exempt from these taxes. Section 501(c)(3) -- the famous one -- describes [nonprofit!] (1) serving charitable, religious, scientific or educational purposes (2) no part of the income of which "inures to the benefit of" anyone.
Tax-exempt nonprofit organizations can, and do, operate in all other particulars like any other sort of business. They have bank accounts; own productive assets of all kinds; receive income from sales and other forms of activity, including donations and grants if they are successful at finding that sort of support; make and hold passive investments; employ staff; enter into contracts of all sorts; etc.
There are some specialized tax rules and accounting practices that apply to nonprofit organizations. If they are of a certain size, they are required to disclose many details of their operations to the general public and to state regulators and watchdog agencies using IRS form 990. This form shows any salaries paid to officers or directors [for incorporated nonprofits!] and to the five highest-paid employees and contracts if any receive over $50,000 in the tax year. The form also requires the organization to divide its expenses into "functional categories" -- program, administration and fund-raising -- and report the totals for each along with the amounts expended on each program activity.
Nonprofit organizations file for tax-exemption by using IRS Publication 557, "Tax-Exempt Status for Your Organization".
To view various kinds of tax-exempt (Section 501) organizations, see IRS Tax-Exempt Organization Reference Chart
Why Are Nonprofits Tax-Exempt?Can a Nonprofit Make a Profit?Tax Exempt Organizations, NonProfit Corporations, Charities
Key Roles(by Carter McNamara) · Clients - Everything in a nonprofit is ultimately directed to serving clients. Clients are the "consumers" or "customers" of the nonprofit's services. Note that services can be in the form of tangible or intangible products. · Board - The board is comprised of individuals from the community and, ideally, is representative of the organizations clients. Law and theory dictate that the board is in charge, and directly accountable for the overall direction and policies of the organization. Powers are given to the board by the Articles of Incorporation (or other governing document, for example, Articles of Association, Constitution, etc.). The board can configure the nonprofit in whatever structure it prefers to meet the organization's mission and usually does so via specifications in bylaws. Members of nonprofit boards are generally motivated by a desire to serve the community and the personal satisfaction of volunteering. Nonprofit board members may not receive monetary compensation for serving on the board. See the library topic Boards for description of the overall responsibilities of a board, key board roles, how meetings are carried out, etc. · Board Chair - A board chair's role is central to coordinating the work of the board, executive director and committees. The chair's role may have appointive power for committees, depending on what is specified about this role in the bylaws. The power of the board chair is usually through persuasion and general leadership. See the topic Board Chair for an overview of the board chair role. · Committees - Typically, the board chooses to carry out its operations using a variety of board committees. The topic Description of Typical Committees for a description of typical board committees. · Executive Director - The board typically chooses to have this one person who is ultimately responsible to carry out the wishes of the board. The executive director is directly accountable for the work of the staff and supports the work of the board committees. For more information, see the library topic Chief Executive Role. · Staff - Staff report to the executive director and may support the work of the committees. · Volunteers - Volunteers are unpaid personnel who assist staff, serve on committees and generally work under the direction of the executive director. See the topic Volunteer Programs for an understanding of the role of volunteers.
Three Major Aspects of Nonprofit Structure(by Carter McNamara)Typically, the nonprofit operations are organized into major functions. These functions usually include central administration and programs. · Governance - The governance function of a nonprofit is responsible to provide overall strategic direction, guidance and controls. Often the term "governance" refers to board matters. However, many people are coming to consider governance as a function carried out by the board and top management. Effective of governance depends to a great extent on the working relationship between board and top management. · Programs - Typically, nonprofits work from their overall mission, or purpose, to identify a few basic service goals which must be reached to accomplish their mission. Resources are organized into programs to reach each goal. It often helps to think of programs in terms of inputs, process, outputs and outcomes. Inputs are the various resources needed to run the program, e.g., money, facilities, clients, program staff, etc. The process is how the program is carried out, e.g., clients are counseled, children are cared for, art is created, association members are supported, etc. The outputs are the units of service, e.g., number of clients counseled, children cared for, artistic pieces produced, or members in the association. Outcomes are the impacts on the clients receiving services, e.g., increased mental health, safe and secure development, richer artistic appreciation and perspectives in life, increased effectiveness among members, etc. · Central administration - Central administration is the staff and facilities that are common to running all programs. This usually includes at least the executive director and office personnel. Nonprofits usually strive to keep costs of central administration low in proportion to costs to run programs.
Management Skills Generally Unique to NonprofitsThe following link provides a wide list of areas of knowledge and skills needed in management activities. The link also lists skills that are somewhat unique to nonprofit management. The nonprofit-unique skills are also listed below.Areas of Knowledge and Skills Needed in ManagementList of Knowledge Areas and Skills Associated with Management Activities
Areas of Knowledge and Skills that are Generally Unique to NonprofitsFundraising and GrantwritingGovernance (Volunteer Board of Directors)Nonprofit Budgeting and AccountingProgram Development and EvaluationPublic PolicyVolunteer Programs
Current Major Challenge: Devolution(by Keri Poeppe)"Devolution" is a word used a great deal these days among nonprofit funders and leaders. Essentially devolution is the short-hand word for a strong trend of cutbacks in federal funding to nonprofits (especially for programs such as welfare (AFDC and certain SSI programs) and the resulting changes in responsibility for administering such programs. Legislation passed by the Congress reduces (and in some cases) eliminates a federal commitment to automatically provide assistance to the poor. Instead, blocks of funds (usually in reduced levels) will be passed through to states, allowing them to decide who will receive aid and who will not. Thus, devolution is associated with the end of what is often called “entitlements” to services previously guaranteed by the federal government.
While devolution provides opportunity for more local control and possibly less bureaucratic waste, human services programs will be at great risk due to reduced federal (and therefore state) funding. Nonprofits (which, on average, receive approximately 30 percent of their revenues from federal sources) will suffer significant loss of funds which may be very difficult to replace. Meanwhile, public demand for human services continues to increase.
Devolution brings many challenges to nonprofit leaders. They must operate more effectively in the face of reduced funding. They must consider substantial changes in the way they have operated. Concepts such as strategic alliances and restructuring will become commonplace.
Revenue: Fees and Fundraising(by Keri Poeppe)
FeesFees may be associated with these services and billed to either the person receiving the service (e.g. the parent with a child in daycare) or to a third party such as a government agency that supports such services. Unlike the private sector where the price of a product or service must cover all costs, nonprofit agencies rarely meet all their costs based upon sales and fees. Instead nonprofits must engage in fundraising and seek additional revenue sources. It is important to note that while many nonprofits provide services that are valuable to our community, it is often difficult to measure the actual results of their services. Changes in an individual's or a community's behavior may take years to be realized. Nonetheless, nonprofits are challenged to demonstrate results as donors become more savvy and funding sources become increasingly limited.
FundraisingAs noted above, nonprofit managers (and the board of directors) must engage in fundraising in order to meet the fiscal needs of their organization. Generally, fundraising is not one of an executive director's favorite tasks. It can be an all-consuming activity, tapping an executive director's creative and social energy. Executive directors are constantly challenged to strike a balance between the time they devote to fundraising and program management. Too little attention to one area can leave an organization bereft of cash or quality services. There are several basic sources of funding in the nonprofit sector. The first is a grant. Grants may be given by government agencies, foundations or corporations, usually to operate a specific program. As noted earlier, agencies receiving government grants to operate human service programs base their reimbursement on fees for the services. Grants from foundations or corporations are generally provided up front and require a report on program activities and expenditures at the end of the grant period. Nonprofit organizations will solicit individuals for funds, also. Individual donations may come from an organization's membership or constituents (e.g. viewers of public television or residents of a neighborhood community). These are generally small donations, ideally from a large number of people. Sizable gifts may come from individuals who are referred to as major donors. Cultivating relationships with major donors requires the energy and resourcefulness of the board and director. Many nonprofits will hold special events to raise dollars. These vary from bake sales to major events. Fundraising can be a full-time job (or a full-time obsession) for nonprofit executive directors. Executive Directors are challenged to balance their time between raising money and program management. If too much time is spent on fundraising, programs and staff may not get the direction and coaching they need. On the other hand, if fundraising takes a back seat to program management, the organization's cash flow will suffer. Two factors will enhance fundraising efforts. One is good programs. Programs that are meeting important community needs and demonstrating results will sell themselves. A board that is committed to its fundraising responsibilities will also be an asset to the organization. Board members who take their role in fundraising very seriously will promote the organization and help bring resources to it. It is important to note, however, how the political climate can affect an organization's fundraising. Foundations and corporations may choose specific issues or causes for priority in grantmaking. In the 1980's organizations working with the elderly received major support from foundations and the government. These same organizations saw their support decrease as youth issues became a major focus in the 1990's.
Unique Nature and Struggles of Traditional Small Nonprofits(by Sandra Larson)
The Heart of the Matter: Leadership and ManagementAt the heart of any successful nonprofit is an effective chief executive and board of directors. These leaders must work as a team with vision, skill, and sufficient resources to accomplish the organization's mission. While leadership is shared, critical management skills must rest with the chief executive. However, the board must be sufficiently skilled in management to assess the work of this director and assist in strategic decision making.
Values as the Bottom LineValues are the driving force in a nonprofit. The bottom line is the realization of a social mission, not profits. This poses complex problems for the leadership team. How are programs agreed upon, progress monitored, and success measured? How are priorities set and consensus reached? How are staff rewarded and what control systems are applicable? Skilled consultants may be needed from time to time to assist the team in answering these qualitative, value-laden questions and focus on appropriate management systems.
Nonprofit Personnel are Often Highly DiverseDiversity is reflected, not only by different races and ethnic groups, but ultimately by different values and perspectives. This strong diversity is a major benefit to the nonprofit because input from a wide variety of perspectives usually ensures complete consideration of situations and new ideas. However, nonprofit personnel must ensure they cultivate and remain open to the various values and perspectives.
Problems are Especially Complex for the Small NonprofitThe majority of nonprofits have small staffs and small budgets, e.g., less than $500,000, which compounds the leadership and management problems they face, especially given their charters and the magnitude of community needs with which they deal. Those new to nonprofits may react that, because nonprofits tend to be small in size, issues in nonprofits should be simple in nature. On the contrary, the vast majority of organizations (regardless of size) experience similar issues, e.g., challenges in planning, organizing, motivating and guiding. However, when these issues are focused in a small organization, the nature of the organization becomes very dynamic and complex.
Sufficient Resources to Pay Leadership May Be LackingWith lack of sufficient moneys, attracting and retaining paid management also can be problematic. Hard work with little career development opportunity encourages turnover of chief executives and staff. This can stall the organization's work. Expertise that is brought in to advise the management may be lost once that leadership leaves.
Lack of Managerial Training is Problematic for the Small NonprofitMany nonprofit managers have been promoted primarily out of non-management disciplines and do not have the managerial skills that are needed to run a nonprofit organization. Training and consultation can do much to help these new leaders/managers gain the skills they seek and help them up a myriad of learning curves that rainbow out in front of them.
Chief Executives Wear Too Many HatsA nonprofit chief executive has to be a current expert in planning, marketing, information management, telecommunications, property management, personnel, finance, systems design, fundraising and program evaluation. Obviously this is not possible, regardless of size. A larger organization may be able to hire some internal experts, but this is certainly not the case for the smaller organization. Furthermore, the technology of management progresses today too rapidly for the non-specialist to keep abreast of new thinking and expertise, whatever the size. Outside expertise therefore is often a must for both the large and small organization.
Too Small to Justify or Pay for Expensive Outside AdviceMost nonprofits, even larger ones, often hesitate to spend money on administrative "overhead" such as consultants or other outside experts because this is seen as diverting valuable dollars from direct service. Of course, most nonprofits have no choice. They don't have enough money to even consider hiring consultants at for-profit rates. Low-cost, volunteer-based assistance often is an appropriate solution.
One-shot Assistance Often is Not EnoughWhile most consultant organizations want to teach managers "how to fish" rather than give them a "fish," "fishing" (management skills) is not something that often can be learned in one consultation. Especially in more technical arenas such as computerization, learning comes while grappling with an issue or management problem over a period of time. Building internal management capacity takes more time than a one-shot consultation. Repeat help therefore is not a sign of failure but of growth -- a new need to know has surfaced.
Networks are LackingEveryone outside the nonprofit sector observes, "Why don't those chief executives get together more, share more ideas, undertake cooperative ventures?" There are many reasons. First of all, running a successful organization (delivering the quality service that fulfills the organization's mission) isn't enough. Most nonprofit directors run a second business -- raising money to support the first. Both are complex and very time-consuming activities, especially when the director wears all the management hats. Second, developing networks or researching joint ventures is time-consuming, expensive and risky.
Nonprofits Usually Have Little Time and MoneyFunders do not seem to think research and development activity justifies new expenditures; at least many are hesitant to fund what might not succeed. While nonprofits may be more entrepreneurial than funders, they have little capital to risk. Collaborative planning will be enhanced by computerization and telecommunications, but these investments also are difficult to fund. In some ways, affordable consultants can substitute for expensive, up-front research and development costs, at least at the feasibility level. In many cases, they can carry an organization through the needed planning to actually develop a new system of collaboration, merger, or automation.
Nonprofits Need Low-Cost Management and Technical AssistanceNonprofits are valuable community assets that must be effectively managed. The need to provide affordable, accessible management and technical assistance to nonprofit organizations is clear for all the reasons stated above: the complexity of the task, the lack of board and internal expertise, the lack of time and money, changing needs, the learning curve, and, finally the importance of the results to the community. What is well done is based on what is well run.
Typical Nature of Planning in NonprofitsFor most nonprofits, they don't have a lot of time, money, or resources for sophisticated, comprehensive strategic planning. The focus is usually on the major issues facing the nonprofit and quickly addressing them. Typical major challenges for the facilitator are basic training of personnel about planning concepts and process, helping the nonprofit to focus and sustain its limited resources on planning, ensuring strategies are really strategic rather than operational/efficiency measures, and helping design small and focused planning meetings that produce realistic plans that become implemented.
Additional Perspectives on Nonprofit OrganizationsIn addition, see the Nonprofit Resource Center for general information about, e.g., whether a nonprofit can be a business, who can benefit from nonprofits, how charities are regulated in the U.S., history of nonprofits, and the difference between "nonprofit" and "for-profit".
General ResourcesGlossary of Nonprofit TermsUSA.gov for Nonprofits

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For the Category of Organizational Development:To round out your knowledge of this Library topic, you may want to review some related topics, available from the link below. Each of the related topics includes free, online resources.Also, scan the Recommended Books listed below. They have been selected for their relevance and highly practical nature.
Related Library TopicsRecommended BooksManaging Organizational Change
Growing Your Organization…...

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...to a business or corporation even more accountability, understanding, and most importantly precision are needed to successfully bring in as well as continue financial sustainability. When dealing within a corporation there are many levels to adhere to within the financial everyday aspects of the corporation being ran with precision. So what happens when an organization is not ran financially like a corporation yet deals with almost the same kind of aspects? A non-profit organization can be one of the trickiest functions of business as well as be the hardest type to run on the grounds of the underhandedness that it can usually entail. While it may not come with the great financial payday, running a successful non-profit often requires twice the effort, time that it would take, as well as encouragement to run a successful multi-platform business or corporation. Non-profit organizations are for people who are passionate about a specific cause along with willing to sacrifice financial benefits in order to ensure the ultimate goal which usually is assisting the common good of the public. Although like any other businesses, some non-profit organizations have to deal with fraudulent activity as well as money hungry individuals. Non-Profit Organization So what exactly is a non-profit organization? The word non-profit invokes many sentiments that would often turn many inquirers in today’s money hungry society. However, there are many benefits affiliated with a non-profit......

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...Case Study Name Personal & Organizational Ethics Instructor Date Case Study Abstract: A Not-for-profit organization has similar issues like a for-profit organization. This case study examines Community Development International, a Not-for-Profit organization, and The Home Depot, a For-Profit organization. It examines both organizations from the beginning to now. It states the mission statements of each organization and describes the work each has done or is doing. It examines the ethical values of each organizations and the issues each has gone through or is going through with solutions as to how to fix each issue. Introduction: When analyzing an organization one should know what type of organization it is. There are two types of organizations, Not-for-Profit (Non-Profit) and For-Profit. According to The Macquarie Dictionary, a Not-for-Profit organization is “formed for the purpose of providing goods or services, but not for the purpose of making profit.” A For-Profit is described as “often plural pecuniary gain resulting from the employment of capital in any transaction”. (The Macquarie Dictionary, Profit, para.1). Community Development International, a Not-for-Profit organization, and Home Depot, a For-Profit organizations, are two different kinds of organizations, yet have similarities when it comes to ethical perspectives. Three ethical perspectives that were utilized to generate this study are Consequentialism, Deontology and Virtue Theory. ......

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...One day I hope to be able to create my own non-profit. The goal for this organization would be to open and maintain teaching hospitals in developing countries that suffer largely from the “brain- drain”. The brain drain is a phenomenon in which intelligent people that want an education leave their home country in search of a better life and prosperous education. These people would greatly benefit their native country if they could learn and practice medicine (often the occupation of choice) there instead of going to Europe or America where there is already an abundance of medical care facilitators. This is non-profit is different from organizations that already exist because existing programs bring in volunteers who come in and take up jobs from native people and as soon as resources are gone have to leave. This is unsustainable in many areas and often leaves the cities in more need then before outside sources had come in. This is not a “feel-good” organization; it is not supposed to make outsiders feel like they are helping and being good people. It is supposed to help the people that already have the ambition to practice and study medicine, be able to accomplish that with residencies and then inspire other people in the area to do the same. The first part of Drucker’s Managing the Nonprofit Organization explains what makes up a good mission and the benefits of sticking true to it. The mission statement for the organization that I have yet to create will probably...

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...Non-Profit to Profit Making • Tasha Garrison HSA 505: Health Care Planning and Marketing Dr. Wendy Whitner October 30, 2011 Describe the external and internal factors that influence the executive team’s decision making and specify which might be most instrumental in making the decision to become a for-profit entity. Why do you think so? In communities around the nation, many not-for-profit hospitals are struggling to stay afloat. Rising costs, a heavy patient load and outdated equipment make some simply not economically viable. For-profit medical groups are often stepping in and buying these hospitals. While some community leaders are relieved that the hospitals are being saved, others worry that it will be at a cost to the economically disadvantaged in the community. With more hospitals on the auction block every day, the effect of this change is likely to become clear in the coming months and years. There are several factors that contribute to an executive team deciding to become a for profit organization. The most common reason is financial. Both internal and external factors can also influence an executive team’s decision to become a for profit entity. Some of the internal factors are employee turnover or employee relations issues, dated or obsolete facilities, and healthcare services that may be out of line with market demand. The external factors that contribute......

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...Challenges of Managing Non-Profit Organizations There are different challenges a non-profit organization face, although I believe that these challenges are also faced by for profit organization at the same similar level. Trust is an issue that both non-profit and for profit organizations encounter at some point in their business, therefore transparency is very important. Transparency warrants organizations to provide clear statements of where their money goes, how it is utilized, and how it is making the organization accomplish their goals. These are not the only factors that are essential to make the stakeholders or anyone interested in the cause to trust the organization. For a non-profit organization trust is a key element to engage volunteers, donors and other business; without trust chances are that the organization might fail to achieve their mission by raising funds. Trust is acquire by performing the goals you have set for your mission and not deviating from it, at least not too far from achieving the organizations goals either for non-profit or for profit organization. It is also important to have a plan (Taylor-Hamm) in case there is a catastrophic event that might jeopardize your organization, it will help you foresee adverse situations and you will be better prepared in case your first plan fails. Performance challenges are faced in the same manner on both types of organizations non-profit and for profit organization. However they might be measured in a......

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