Nonprofits Are Businesses Too!
I have a pet peeve. It’s when someone references a nonprofit as something other than a business. Most U.S.-based 501(c)3 public charities, also called nonprofits, are in fact corporate entities just like any other for-profit corporation. The major differences are that it receives at least 1/3 of its revenue from public support such as from donations and grants, there are no shareholders and its profits are always reinvested back into the business, and it doesn’t generally pay taxes on the revenue that it earns. A nonprofit is a business and as such, it requires proper planning and business models to ensure that it can become sustainable.
The term nonprofit is very misleading and honestly is only a reference to the corporate tax structure with state governments and the IRS. Nonprofits are corporations that are exempt from paying taxes on revenue that is directly related to the organization’s mission. There are several different types of nonprofits under the IRS 501(c)3 tax code, but in this article, we are going to stick to public charities.
How to create a successful startup nonprofit
Now that we’ve clarified that a nonprofit is a business just like any other business, let’s talk about what I call the 5 Ps of a successful nonprofit business plan. These are the five core areas that every nonprofit founder and board should think about when considering a nonprofit startup:
- Problem — what is the problem that you are looking to solve? It’s not enough to simply recognize that there is a problem, you need to clearly understand how the problem is negatively impacting the community that you want to serve and how your solution will help bring about positive change to address the problem.
- People — who are the people that are experiencing the problem and that your solution will help. If your organization will be focused on animals, then they will replace the people as the population that you will serve. If your work is focused on conservation or saving the planet, ultimately, the people are those who depend on the planet to live on.
- Purpose — why is your organization needed and what will it seek to achieve over the long-term? Every business has a reason for existing and this is where the purpose is defined. Your purpose statement will eventually be the inspiration for your mission and vision statements. The purpose statement will also be used in your Articles of Incorporation when you file the paperwork to form your corporate structure in your state.
- Payoff — this is the overarching outcome that your organization will seek to achieve. What will happen as a result of your organization’s work? What will be the transformation for the problem and people defined in areas 1 and 2? You must be able to have a vision of the end result when you are starting. Otherwise, it becomes too easy to get off course and start solving a multitude of other problems that are outside of your organization’s original mission.
- Profit — contrary to popular belief, nonprofits NEED to generate enough revenue to earn profits that can go back into the operations of the organization. In most cases, the profit will go into a reserve fund and can be used to create interest-bearing investments, plan for growth and scale, explore additional service expansion, etc.
Nonprofit businesses are an important part of our society and we need them. Not only do they provide vital social services, but they also contribute to the economy by providing jobs and contributing to the GDP (gross domestic product). When everyone recognizes that nonprofits are businesses too then it forces founders and leaders to build businesses with sound business models driving toward sustainable profits and it forces the business world to treat nonprofits similarly to other startup businesses in terms of B2B opportunities, collaboration, and even healthy competition.
If you love nonprofit businesses and social entrepreneurship like I do, come hang out with me as I share thoughts, business strategies, how-tos, and living life on purpose.
