Nonprofits need to make a profit to support their mission. Imagine if the National Urban League never made a profit? How would they fund their housing, career and economic initiatives?
These organizations are termed "nonprofit" because, different from a for-profit business, the profits they make cannot excessively benefit Directors, Founders, Officers and other organization insiders. Such benefit can lead to what the IRS terms "private benefit" or "private inurement." Private benefit or inurement activity can
subject the organization to and excise tax, and/or
put the organization at risk of losing it's tax exempt status.
Section 501 of the Internal Revenue Code states:
"No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual."
Although nonprofits cannot provide excessive benefits to insiders, Directors, Officers and Employees are allowed to receive competitive salaries and benefits. To learn more about allowable nonprofit benefits, see Yes, You Can Work for a Nonprofit and Make Good Money.
Nonprofits can make a profit. In fact, they should make a profit. They just cannot use their profit in the same way Jeff Bezos uses Amazon's profits. This distinction helps ensure that nonprofit funds are used to leverage the charitable impact our communities desperately need.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.