Is earned income right for your nonprofit?

Is earned income right for your nonprofit?

01/29/2020 Tags: Announcements, In the News

The nonprofit cycle often looks like this: An issue arises that impacts society. An individual or a group creates a nonprofit to address the issue. Resolving the issues requires money —usually, a lot of money. Those who manage and donate to the nonprofit look for ways to raise money.

Historically, donors provided the bulk of the funds that kept nonprofits running.

Recently, though, donors — and sometimes the public — have encouraged nonprofits to find other ways to fund themselves, often through “earned income.”

So, if a nonprofit’s mission is to, say, end homelessness in their area, their donors might want them to rely less on donations and more on income from some kind of business model — like a thrift store or a coffee shop.

In theory, the shift seems to make sense. The more revenue streams a nonprofit has, the less they have to rely on the ebb and flow of donations.

However, there are unintended consequences with such an approach, too.

Solving an issue or running a business?

When those working for a nonprofit have to split their time and attention between their mission and running a business, it’s oftentimes the mission that suffers. Earned income isn’t just another source of revenue for a nonprofit; it’s also a second job for those fulfilling that nonprofit’s mission.

Also, in the U.S., between 50-80 percent of businesses fail every year. And even if a nonprofit were to start a new, successful business line, it could dramatically increase their administrative and operating costs, which could negate any profits from the business.

There is also the additional challenge of paying more taxes on any additional earned income. When it comes to trying to minimize taxes, the administrative burden can get heavy for a nonprofit’s staff and management.

Does earned income ever make sense?

Despite the pitfalls, some nonprofits could benefit from a new revenue model.

If the nonprofit you work for or help fund is considering earned income, here are some helpful questions to ask:

  • Does the business line fit with the nonprofit’s mission? If you’re trying to end homelessness, will that thrift store or coffee shop have a direct impact on those efforts? If so, how?
  • If your mission is serving a certain community, can your business employ members of that community? So, if you want to help wounded veterans, can you employ those same veterans?
  • Will the sales directly — not indirectly — help your mission? Using the thrift store again as an example, are you selling professional clothes to those struggling with homelessness so that they can go on a job interview?
  • Do you, your board members, and major donators fully understand that neither donations nor business profits are a sure thing?

There isn’t a magic number of “yeses” you need to decide if earned income is right for your nonprofit. But if there are more “noes” than “yeses,” you might want to take a hard look at whether earned income is right for your organization.


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