9 Nonprofit Startup Myths: What Not To Believe
When starting a nonprofit, you’ll get advice from kind and well-meaning individuals.
Unfortunately, some of the advice will include common nonprofit myths.
Let’s take a few minutes to bust 9 nonprofit myths. Myths 8 and 9 might surprise you.
1. Nonprofits cannot make a profit
Nonprofits are a corporation and can make a profit. However, the primary use of these profits must be to accomplish the charitable purposes of the nonprofit.
Think about this. A nonprofit is a legal corporation. That’s a business structure.
How many businesses do you know that operate for years if they don’t make a profit? None!
A nonprofit is no different. At a bare minimum, a nonprofit needs to have income that covers all expenses. But if you only cover expenses, how do you expand your nonprofit or ministry?
Making a profit is not a bad thing for nonprofits. In fact, good fiscal stewardship suggests that nonprofits keep 6-months of operating expenses in operating reserves. Doing so means making a profit!
Perhaps your nonprofit has the vision to expand into a new region. Doing so will require seed money to kickstart the expansion when the time comes. Saving for such growth will require making a profit.
Find out more about how nonprofits work.
2. Nonprofits cannot sell items or services
Nonprofits can sell items and services. This generates revenue. The revenue generated by a nonprofit needs to primarily be used toward the charitable mission of the nonprofit. Additionally, be aware of state and federal laws as the revenue from the sale of items may be taxable, even to a nonprofit.
So, the myth that “nonprofits cannot sell items or services” is untrue, but there are some caveats.
Nonprofits can generate earned income. This is revenue from the sale of services or items.
Where a nonprofit can get in trouble with the IRS is when they sell services or items that are not directly tied to their charitable mission.
For example, the YMCA and Boys & Girls Clubs charge a membership fee. This is revenue that is directly tied to their mission. Charging a reasonable fee is perfectly fine to do since the membership fee is for services that are directly related to their charitable mission.
3. Nonprofit founders own the nonprofits they start
Founders do not own the nonprofit. Nonprofits in the United States are corporations and therefore are governed by a Board of Directors. An Executive Director can be fired from the nonprofit they started and they have no claim on the nonprofit entity.
False! You may have started it, but it’s a corporation. Therefore, you don’t own it, the Board of Directors does and they decide what happens to it.
Your board leads the organization to fulfill its social impact mission. The president, CEO, or Executive Director may be the top employee of the nonprofit, but he/she reports to the Board.
If you want to call the shots, and still help the world, start a business instead of a nonprofit. This doesn’t require incorporation and you can decide how to use the proceeds of your business.
Business as a Mission is not a new thing. Many successful business owners use their time, talent, and treasure to positively impact social missions.
4. Nonprofits are not allowed to have paid employees
Nonprofits can and should have paid employees beyond the smallest of startup nonprofits. Nonprofit employees can receive full compensation and benefits packages including salary, insurance, vacation, paid time off, and many other typical benefits.
We’re busting another myth here.
Of course, nonprofits can have paid employees. That’s how we get some of the best talent, experience, and wisdom onto our teams. We as nonprofits are corporations. Corporations have employees. For that matter, nonprofits can have volunteers, interns, and contractors as well.
Nonprofits can offer full benefits and compensation packages. Some will cover moving expenses for new leaders and others provide stipends and bonuses.
As you can imagine, different nonprofit job titles with different job functions will get paid different amounts.
The big thing is that compensation studies should be done to ensure that all compensation is in-line with commensurate positions. Nobody is going to become the next billionaire working at a nonprofit.
5. Donations Are The Only Source Of Funding
Donations are not the only source of funding. Nonprofits can get funding from many sources including donations, grants, special events, and even selling products and services.
Sure, donations make up the bulk of many nonprofits’ funding. In fact, 70% of charitable giving comes from individual donors. But donations are not the only source of revenue.
Grants are another source of funding. These grants come in many forms whether government grants or from individual family foundations or charitable trusts. Some grants have specific purposes like capacity-building grants.
Another source of income is the sale of products or services. Yes, nonprofits can sell products and services at affordable prices to constituents and customers.
We recommend using all three sources in order to maintain a diversified revenue stream model. It helps build fiscal resiliency.
6. Nonprofit Startup Grants Are Easy To Get
Contrary to popular belief, foundations are unlikely to give grants to brand new nonprofits without a track record of demonstrated impact. There are very few grants specifically targeted at starting new nonprofits.
Wow! Call this myth BUSTED!
New nonprofits will find it extremely difficult to find grant funding.
It typically takes 2-3 years of the existence and operations of a nonprofit before most nonprofits are able to secure grant funding for new and innovative projects.
Less than 20% of charitable giving in the U.S. comes from grants. Over 70% of charitable giving is in the form of individual contributors.
7. If you build the program, you’ll find funding
New programs are not more likely to receive funding. There are some donors that love to fund new things while others want to only invest in programs that are proven to work and can show a history of significant social impact.
Programs for nonprofits are no different than services and service programs for businesses.
Just because you build it doesn’t mean they will come.
Programs, services, and items need to have market analysis conducted before you rely on them for revenue generation or to gain the interest of funding sources.
Programs should be tested at a small scale to prove the need and allow you to tweak the program to best meet the need.
Funding for programs may not come from a grant and will require fundraising from individual contributors.
8. Nonprofits cannot spend more than 15% on overhead
Nonprofits are not limited to 15% overhead. There is no specific limit on the amount that a nonprofit can spend on overhead. However, the BBB Standards of Charity Accountability recommend no more than 35% be spent on non-program expenses, leaving 65% for program expenses.
Not sure where this myth came from but it is certainly untrue.
Nonprofits are not limited to 15% overhead costs. Some nonprofits may be closer to 30% and others around 9%. The reality is that it just depends.
Now, it is important to keep in mind that many services that rate charities use this value as a means of grading a nonprofit as many donors believe that the lower the overhead costs, the more their dollars are being put to good use in the programs.
Unfortunately, this is somewhat of a myth as well. Good business owners will recognize the need to invest in excellent administrative support of the programs in order to achieve the charitable mission.
Check out these nonprofit operating reserve myths that need to be debunked.
9. Nonprofit Executive Directors Set Their Own Salary
Nonprofit Executive Directors do not set their own salary. The Board of Directors will set the compensation for the Executive Director/President. The salary for key employees should be based on research, and compensation surveys to ensure salaries are in line with other similar roles and organizations.
No, the top nonprofit leader does not get to set their own compensation package.
Why? Nonprofits are a corporation. Therefore the Board of Directors owns this part of the process. The Executive Director may likely propose a compensation package to the Board but, the Board could easily reject it and propose something different.
This is where compensation package analysis and market studies will help establish reasonable salary ranges along with compensation and benefits packages.
This does not mean that the Board will also set the salary of every staff member. That’s up to the board to decide but as a nonprofit grows, usually this is left to the employee leadership to determine.
These nine myths need to be busted. They can inhibit a new nonprofit’s ability to plan, forecast, and grow its impact effectively.
We hope you walk away seeing that nonprofits are corporations with a specific charitable mission and that for-profit corporate rules have significant application in nonprofits.
What’s one nonprofit myth you heard and had to bust?
How To Start A Nonprofit Next Steps
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