Nonprofits may not be in it for the money, but the nonprofit sector is actually big business. In fact, nonprofits generate about $900 billion each year in the United States' economy, making up more than 5% of gross domestic product (GDP). Religious groups, healthcare organizations and schools are all examples of nonprofits that handle a lot of cash.

Yet, despite that big number, there are lots of rules and regulations about what nonprofits can and cannot do. The laws around income and nonprofits can be confusing. Some nonprofits see millions of dollars pass through them each year, and in some instances, they can even make a profit, while maintaining their nonprofit status.

The Difference Between Nonprofit and For-Profit Entities

Most businesses are for-profit entities. Their main financial goal is to make a profit (defined as revenue left over after covering expenses), which is then distributed to owners, shareholders, or reinvested in the business. Businesses must pay taxes on the profits that they generate.

Nonprofits, on the other hand, do not focus on making money. Instead, their main goal is to support a cause. In order to be deemed a nonprofit, an organization must be working toward a public good. Because they are meant to support the public good, nonprofits receive tax exemptions, and are not intended to generate profit. The people who operate nonprofits (usually known as founders) can make money by being paid by the nonprofit for their work, but they don't receive additional compensation, based on how much money the organization generates, as is often the case at for-profit businesses.

Who Designates Nonprofit Organizations?

The line between for-profit and non-profit entities can be confusing. For example, many hospitals and educational institutes are nonprofits, despite the fact that it seems like they generate lots of money.

The Internal Revenue Service (IRS) is responsible for determining which organizations are nonprofits and for regulating nonprofit tax information. Section 501(c)(3) of the Internal Revenue Code covers nonprofits and defines what organizations qualify. Before they begin operation as a nonprofit, an organization must apply for 501(c)(3) status.

Can Nonprofits Sell Things or Make A Profit?

To support their operating costs and staff, nonprofits must generate revenue. Often, this is done through grants or donations, but nonprofits can also sell goods or services to raise money. Hospitals and educational institutions are nonprofit, but still sell goods and services.

Sometimes, after covering operating costs, nonprofit organizations can end up with a surplus or a profit. In order to maintain their tax status, this money must come from activities related to the organization's mission. For example, if the nonprofit has a surplus from its normal fundraisers and events, that is okay. However, if it earns a profit by renting its building for unrelated events, that profit is taxable as normal business income.