To be eligible for non-profit status, an organization must serve the public good in some way. This means that they are not allowed to distribute profits for anything other than to promote the organization's progress. As such, they must make their financial and operational information public so that donors can see how their contributions are being used. Donors can also deduct their donations from their tax returns. Non-profit organizations do not pay taxes on money received through fundraising.
However, there are restrictions on how that money can be earned, since the organization is exempt from taxes. Donations, money raised at fund-raising events, and items sold in the name of fundraising are all acceptable. While there are other ways in which a non-profit organization can make money (for example, by selling gift baskets that were paid for but never recovered after a fundraising event), these should be kept to a minimum to avoid losing the tax exemption. In contrast to for-profit companies, founders, investors, and high-level leaders of non-profit organizations do not have a financial interest in the company's success. The main objective of a non-profit organization is to promote a religious, charitable, scientific, educational, public safety, literary, or cruelty prevention cause and generate some public benefit in some way.
Nonprofits may generate revenues that exceed the amount of their expenses, resulting in profits. However, these profits must remain a small part of the non-profit organization's operations. To obtain non-profit organization designation, an organization must show its net income and assets (income) in its statement of activities and its statement of financial position. Nonprofits derive their income primarily from donations, contributions, and membership fees. They may also establish a compensation policy to help them determine how much senior executives will be paid in salary and ensure that that amount is in line with that of other similar organizations. However, non-profit organizations must disclose their operational and financial information to the public to assure donors that their contributions are being used correctly. In conclusion, nonprofits are allowed to make profits as long as they use them solely for furthering their mission and do not distribute them among shareholders or owners.
They must also disclose their financial information publicly so donors can see how their contributions are being used.
