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Some Potential Pitfalls of Running
a Non-profit Organization Like a Business
By Paul Sehmer, CPA
Shareholder
I've often heard people within the business community state that non-profit organizations are no different than any other type of business and they must be run like any other for-profit business. While certain aspects of this statement are true, there are other aspects, such as constraints placed on a non-profit organization's activities, that a typical for-profit business need not consider. So, while there are similarities between non-profit and for-profit organizations, let's explore some of the key constraints on activities that face many organizations within the non-profit environment.
 Non-profit organizations have been subject to a host of outside constraints for decades - requirements set by Congress, the IRS, funding sources, and state governments. These outside constraints continue to increase. Although both for-profit businesses and non-profit organizations face outside constraints, for-profit businesses traditionally deal with fewer and the nature of the constraints differs. Some of the requirements applicable to non-profit organizations are:
* Eligibility Requirements. Agreements with funding sources may specify the individuals or areas eligible to receive goods or services when the non-profit organization carries out its programs or activities.
* IRS Requirements. Tax exemption is a privilege granted by Congress through the IRS. In return, non-profit organizations are subject to a range of IRS requirements different from those of for-profit business enterprises. These requirements include that:
o A non-profit organization's income, expenditures, and activities be substantially related to its exempt purpose;
o The organization pay taxes on income from activities not substantially related to its exempt purpose;
o The non-profit organization limit lobbying activities and avoid all partisan political activities;
o None of the organization's assets inure to the benefit of a private individual;
o The organization be organized and operated to provide public, not private, benefit; and,
o Specific reports be filed to demonstrate compliance in these and other areas.
* Funding Source Requirements. Previous paragraphs discuss the fact that funding sources often place restrictions on the use of resources provided to non-profit organizations. Many non-profit organizations are dependent on those funding sources; therefore, they must plan and implement programs and activities within the funders' prescribed parameters.
* State Fundraising Requirements. Fundraising is often an integral part of a non-profit organization's existence, and a growing number of states regulate fundraising activities and require regular reports.
These are just some of the reasons that, while it is important for non-profit organizations to run their operations like any other successful for-profit business, the constraints placed on organizations within the nonprofit environment that differ from the for-profit world cannot be ignored.
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At Winter, Kloman, Moter & Repp S.C., our not-for-profit team provides quality audit, accounting, tax, and consulting services to a variety of not-for-profit agencies, government funded businesses, private foundations, and assorted charitable organizations. Our experienced team has helped many not-for-profit organizations throughout Southeastern Wisconsin grow and thrive including:
- Human Service Agencies
- Cultural & Arts Organizations
- Charitable & Religious Organizations
- Educational & Day Care Institutions
- Professional & Trade Associations
- Assisted Living Facilities
- HUD/WHEDA Housing Projects
- Government-funded For-Profit Businesses
We concentrate on helping you best manage public or donated funds, analyzing how to get the most from your resources and helping you implement your plans to stretch every dollar. Our team of professionals understands your complex financial reporting needs, and will help you to accurately report your finances in an understandable way. We provide the independent audit and accounting services required by many of your funding sources by taking a value-added approach, implementing ever-changing tax reporting requirements, providing information technology consulting, and working with every aspect of your organization to support your success.
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