Nonprofits Can Make Profits

Nonprofits can make profits

When a person or group of people wants to set up a corporation in California, they must choose whether it will be a “profit” or “nonprofit” corporation.  The decision is largely based on the goal of the corporation.  If the goal is profit-making for the founder or investors, the business will be established  as a for-profit  corporation. But if the goal is to provide some kind of community benefit or service — for example helping young people find employment, preventing drug use by pregnant moms or providing exhibit space for California artists — the tendency is to establish a nonprofit corporation.

The word “nonprofit” is a legal term that emphasizes that nonprofits do not exist to generate profits for their owners. However, nonprofit organizations can earn profits.  That is, they can generate more revenues than they spend in a given year: they can have money in the bank.  But nonprofits must use their income for the charitable purposes for which they were formed.  If they do not, they risk losing their nonprofit status.

In truth, the word “nonprofit” does not adequately describe what we call nonprofit corporations.  Many public figures, particularly the legislature, use the term “community-based organizations,” referring to the fact that many nonprofits are set up to serve a specific community or group of people.  This term does not work well because many organizations are statewide, national  or international in scope.  National organizations like the Independent Sector refer to nonprofits as “charitable organizations.”  This phrase emphasizes the support nonprofits receive from private charitable contributions.  However, this term does not work well because charitable contributions represent only a small portion of nonprofit income.

Some people use the term “voluntary sector,” which refers to the significant involvement of volunteers in nonprofit organizations.  Again, this name does not work well because the vast majority of nonprofit activities are carried out by paid staff, not volunteers.  A new term is gaining popularity:  the “civil society.” This term emphasizes the citizen base of many nonprofits, but implies a membership  structure;  and not all nonprofits are membership  organizations.  Unfortunately, none of these terms is either descriptive enough or clear enough to make the successful transition into common parlance.

There is growing use of “public benefit corporation” which emphasizes that nonprofits benefit all parts of society.  “Public benefit corporation” seems best to describe the majority of organizations that come to mind when we say “nonprofit.”  This term might also eliminate the misunderstanding that nonprofits cannot make a profit, and it makes a direct connection between the corporation’s existence and its mission to benefit the public.  Whatever we call nonprofit corporations, it is important to remember that they can make a profit.