Ken Goldstein, MPPA

Ken Goldstein has been working in nonprofits and local government agencies from Santa Cruz, to Sacramento, and back to Silicon Valley, since 1989. He's been staff, volunteer, board member, executive director, and, since 2003, a consultant to local nonprofit organizations. For more on Ken's background, click here. If you are interested in retaining Ken's services, you may contact him at ken at

Tuesday, June 30, 2009

Can non-profit organizations meet all the needs for-profit businesses currently meet?

I just came across an interesting blog post by Stephen Monrad with title of "Can non-profit organizations meet all the needs for-profit businesses currently meet?" His conclusion is that "If a non-profit organization wanted to produce toothbrushes, there is no reason in principle that it couldn't."

I found it to be an interesting post. What follows is the comment that I left on the blog:

In the original post you say that there "is no reason that I could find that they need to limit their work to charitable or social goals." Well, actually, there is... In the U.S., at least, nonprofits receive their tax-exempt status - 501(c)(3) - from the IRS. The application requires a statement of the organization's charitable, educational, or social goals or mission. Presumably, the IRS reviews that before approving the application... presumably...

But, that doesn't mean that a nonprofit couldn't manufacture toothbrushes. If, somehow, the production of toiletries were related to the charitable purpose. For example, I'm aware of a catering company that is a tax-exempt nonprofit. The nonprofit's mission is to train at-risk populations in how to work in the food industry. New cooks enter the program, are trained, work real catering gigs, and then graduate to make room for the next group of new cooks.

To the clients hiring them for parties, they're just like any other caterer, but to the IRS it's a legitimate social enterprise providing educational assistance. I don't know how to translate that story to making toothbrushes, but you get the point.

A nonprofit can also run a for-profit business. A typical example would be a thrift shop set up to support a social cause. In this case, the IRS sees the profit from that enterprise as "Unrelated Business Income." The nonprofit does pay taxes on that portion of their income, but as long as it doesn't become their primary activity, it doesn't endanger their tax-exempt status for the charitable work.

In one of the comments, Clyde writes, "... Losses are a definite probability, but profit is a no-no, by definition." You'd think so, but "nonprofit" is really a misnomer. Nonprofits can (and, in good years, should) earn more than they spend in order to build reserves for lean years (such as we're now experiencing). What nonprofits are barred from doing is distributing that profit to the Board or principals as dividends. Profit is wonderful, as long as it is re-invested into the charitable mission.

Anyway, thanks for this post - It's an interesting conversation.