Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors
Marty Zwilling

GET UPDATES FROM Marty Zwilling
 

If You Think Making Money Is Hard, Try a Nonprofit

Posted: 12/19/11 02:23 PM ET

A common misconception I often hear in the start-up world is that nonprofits are easy and safe, since they don't have to pay taxes, and they don't have to make a profit for their shareholders. In reality, from the feedback I get from nonprofit executives, exactly the opposite is true.

Technically speaking, in the United States, a nonprofit corporation or association is one which has been exempted from federal income taxes by meeting the criteria set out Section 501(c) of the Internal Revenue Code, most notably religious, educational, and charitable entities. Other countries have similar exemptions for similar organizations.

Yet even a nonprofit has to make a profit on everything it sells, in order to cover operating expenses (salaries, offices, equipment, research, travel, etc.), unless it relies wholly on donations. Even then, the business and leadership efforts to solicit and manage donations cost real money, and may be more difficult than the marketing and sales jobs of most start-ups.

Here are the common reasons I hear that make starting and running a nonprofit actually more difficult than starting and running a conventional business:

  1. Creating a nonprofit 501(c) business is a long and arduous process. You can start an LLC for-profit in less than a month, often for less than $100. A nonprofit 501(c)(3) status requires filing IRS Form 1023. The form must be accompanied by an $850 filing fee, and may take as long as two years to complete successfully.

  2. Investors are not interested in nonprofits. Even nonprofits usually require startup funds for facilities, people, and inventory. But because they can't project excellent returns on investment, no investors will likely be interested. Also, they can't sell shares on the stock exchange to raise money, even though both the NYSE and Nasdaq are nonprofits. That means they need to grow organically, or find a philanthropist.

  3. Reputable nonprofits need to keep their operating expenses low. This usually means keeping wages low, and no fancy facilities. Thus it's hard to attract top-notch talent, premium locations, and first-class marketing campaigns. Managing volunteers, and running any organization with these constraints is a challenge.

  4. Results are always subject to public scrutiny. Most start-ups, as private companies, don't have to disclose their salaries and spending habits to anyone other than the IRS. Nonprofits have to answer to watchdog organizations like Charity Navigator for how much of their proceeds actually make it to the causes they proclaim to support.

  5. Some laudable nonprofit missions are hard to sell to supporters. A common complaint from many nonprofits is that both government and private funders would rather spend their dollars on "sexy" causes such as children's charities, cancer, and heart disease, rather than long-term causes like global warming and erasing hunger in Africa.

Unfortunately, misuse scenarios, like the lavish lifestyles of leaders and scams, have given the nonprofit environment a bad name, making things even tougher. Even reputable organizations, supporting veterans, the police, firefighters or children, often raise eyebrows, with alarming real data like these from the 10 Inefficient Fundraisers report from the Charity Navigator website:

  • Cancer Survivors' Fund -- 91% of donations spent on fundraising
  • The Committee for Missing Children -- 89% spent on fundraising
  • Firefighters Charitable Foundation -- 87% spent on fundraising
  • Children's Charity Fund, Inc. -- 86% spent on fundraising
  • Disabled Police Officers Counseling Center -- 86% spent on fundraising

These numbers vividly show that nonprofits with good causes can fail to achieve satisfying results, in the same way that for-profit startups often fail, even with good products. Despite these challenges, my advice is still to follow your heart and your passion when starting a business.

You shouldn't choose a nonprofit, or a for-profit, because one seems easier, or one can make more money. Do it because you love the cause, the service, or the product, and the challenges will get lost in the satisfaction and results you achieve along the way.

 

Follow Marty Zwilling on Twitter: www.twitter.com/StartupPro

A common misconception I often hear in the start-up world is that nonprofits are easy and safe, since they don't have to pay taxes, and they don't have to make a profit for their shareholders. In real...
A common misconception I often hear in the start-up world is that nonprofits are easy and safe, since they don't have to pay taxes, and they don't have to make a profit for their shareholders. In real...
 
 
  • Comments
  • 9
  • Pending Comments
  • 0
  • View FAQ
Comments are closed for this entry
View All
Recency  | 
Popularity
02:20 PM on 12/23/2011
As being a nonprofit company it is real hard to fight the big companys. The big nonprofits pay big money for grant writters and many other things to were our nonprofit is small and besides expances like ele, water phone ect all monies goes back into the business. I just wish we could find a couple people or companys that want to donate so we could grow more. What we do is in big demand and very misunderstood. I have recovery homes for men with substance abuse (alcoholis and drug addicts) and we care about our people and work hand in hand with them. We make them accountable and responsable for their actions and recovery. We make them pay so no one else has to but so many leave owing us money and other reasons. But we will grow as we can.
photo
Elaine Fogel
Marketer. Blogger. Speaker. Writer. Nonprofiteer.
01:11 PM on 12/20/2011
Having worked on the inside of the nonprofit sector, and now working with nonprofit clients, I can say with some experience, that the majority of nonprofit organizations in North American are genuinely interested in fulfilling a mission. They are not racketeers, nor are they trying to cover "high salaries for management, perks, first class travel and lodging for their personnel."

Nonprofits are an essential part of our society, helping to solve the problems that government and the private sector cannot. Most employ hard-working, committed people. Most have dedicated leaders. Most spend TOO little on their infrastructures, when they should be investing more to build them. If they invest too little, they can't accomplish their objectives.

Could they operate their organizations more efficiently? Probably. But, then we could say that about most businesses, too.

Why anyone would consider starting a nonprofit as an alternative to starting a business is beyond me. The people who start nonprofits do it because of a calling, a life experience that sets them along the path, or a passion for a particular cause. It is a long road to achievement. Longer than most start-up businesses.
photo
des946
Consultant
12:32 PM on 12/20/2011
Too many of the non-profit organizations wind up being rackets from which select individuals earn or receive exorbitant salaries, perks and bonuses. Remember the scandals with United Way and other such non-profit organizations? History unequivocally demonstrates that too many non-profit organizations are simply "rackets" for the insiders.
photo
HUFFPOST SUPER USER
David Danio Jr
Sales and Business Consultant
11:33 PM on 12/19/2011
Sometimes we just hide the true intentions by showing as a non profit institution to be exempted from other obligation. But if you really mean to have business, you must be ready and persistent to continue existing whatever needs may arise to tackle. I don't think that shifting or having non profit entity may help you have better business.
06:24 PM on 12/19/2011
great informations. thanks.
paul,
http://paulivanuca.me
03:45 PM on 12/19/2011
Hi Marty,

Some of the difficulties you identify were used when we reasoned the case for a social purpose business instead of charity:

""In Chapel Hill, North Carolina, for example -- where P-CED was born in 1997 -- multi-millions of dollars are donated each year to charities, after which the money is typically given away, spent, and gone. Two churches adjacent to the university campus recently raised in excess of four million dollars to improve their buildings. (As a counterbalance, a third church chose to forego its own plans for a building and donated its entire building fund to a badly-needed support program for the elderly.) If twenty percent were set aside to fund a "P-CED enterprise", that money would never go away, but would instead grow as it should in business. Once the seed capital is available and the business plan implemented, everything after that goes the normal way of business. Employees are paid according to the local pay scales, receive benefits, and so on. They would also enjoy profit-sharing directly for themselves from a total pool of ten percent of profits. Forty percent of profits would be rolled back over into the company for growth. The remaining fifty percent would go to the trust fund. Thus, aside from the final direction of profits, everything is exactly the same as with any other business enterprise."

http://www.p-ced.com/1/about/history/
photo
HUFFPOST SUPER USER
Kate Emery
08:12 PM on 12/19/2011
My thoughts exactly Jeff. Doesn't have to be an either or... the third way, as is often the case wins the day.
photo
des946
Consultant
12:37 PM on 12/20/2011
The critical question, to me at least, is how much of the received money actually winds up going for the purportedly "intended purposes"? years ago when my EX worked for the March of Dimes, only about 10% of the donations were used for the "intended purposes" as advertised. The other 9-% went towards some high salries for managment, perks, first class travel and lodging for their personnel, etc. The "onn-profits" merely become a vehicle for some to become enriched, and unduly so. The only good charity that I know of is St. Jude's hospital for children.
03:22 PM on 12/19/2011
Hey Marty,

Kelly Reddington from Givengi here -

Non-Profits are doing a fabulous job of utilizing business to generate donations, and what we do at Givengi, is make any Non-Profit, a business. We take care of the overhead costs and the products so that the Non-Profits can focus on their mission - improving the lives of others.

We began with a focus on fundraising because we realized that the current fundraising model didn't exactly work efficiently. On average, 22 to 43 of ever $100 raised is spent on raising said $100. Totally out of hand!

So we built a fundraising model that has the potential to re-imagine the Non-Profit/Business relationship.

Another fantastic development has been BCorp certification. This allows entrepreneurs to start businesses with a social purpose in a way that previously never existed. Social entrepreneurship is about to become HUGE. So to any prospective entrepreneurs out there, look into starting a BCorp to amplify the value you offer to society.

As always Marty, pleasure reading your work.

Until Next Time,

Kelly