What Is Not-for-Profit and Can It Earn Revenue?

A not-for-profit organization is a legal entity structured to support a specific mission rather than generate financial returns for individuals or shareholders. Unlike for-profit businesses, which prioritize earning profits for owners or investors, not-for-profits focus on serving the public good or a cause, whether in education, healthcare, social services, medical research, advocacy, or some other area.

One common misconception is that not-for-profits cannot generate revenue. Not-for-profit organizations can legally earn income through various channels, including donations, memberships, grants, and selling goods or services. Unlike for-profit businesses, revenue from not-for-profit organizations must be reinvested in the organization’s programs and operations rather than distributed to private individuals.

This raises an important question: Can a not-for-profit earn revenue while maintaining its tax-exempt status? The answer lies in understanding how income is generated, used, and reported under legal and financial guidelines. This article explores how not-for-profits can generate revenue and accept donations, the regulations they must follow, and how they can remain financially sustainable while staying true to their mission.

What is Not-for-Profit?

A not-for-profit organization is a legally established entity designed to pursue a specific mission or purpose without distributing financial gains to individuals or shareholders. Unlike businesses that aim to maximize income for their owners, not-for-profit organizations focus on advancing social, educational, charitable, cultural goals, or services that benefit the public or a specific community.

Here are some key differences in the key characteristics of not-for-profit organizations:

Mission-Driven

The primary goal of a not-for-profit organization is to carry out activities that align individual donors with a larger purpose rather than generate personal financial gain. Many of these organizations promote the arts, provide educational programs, are sports clubs or homeowners associations, offer healthcare services, or support underserved communities.

Reinvestment of Surplus Funds

Any extra revenue a not-for-profit generates is used to support its programs, services, or overall operations. Unlike for-profit business entities, these organizations cannot distribute earnings to individuals such as founders, board members, paid staff, or stakeholders. Funds from for-profit organizations must directly contribute to furthering the mission rather than benefiting private interests.

Tax-Exempt Eligibility

Many not-for-profit organizations qualify for exemptions from federal income tax under section 501(c)(3) or other relevant sections of the Internal Revenue Code. This status allows them to avoid paying federal taxes on income used to support their mission, making it easier to allocate resources toward programs and services.

Differences Between Not-for-Profit and Nonprofit Organizations

Although “not-for-profit” and “nonprofit” are often used interchangeably, they can carry different meanings depending on the context. While nonprofit organizations generally focus on activities that benefit the public, not-for-profits can also include groups that serve the interests of their members, such as business associations such as social and sports clubs, and business leagues or professional associations.

The term nonprofit term typically refers to organizations that qualify for federal tax-exempt status, such as charities, foundations, or educational institutions that serve the public. Not-for-profit is a term used more broadly to describe organizations not operating for private financial gain. These orgs can include clubs, associations, and other groups that may or may not apply for tax-exempt status.

Can a Not-for-Profit Earn Revenue?

Yes, not-for-profit organizations are legally permitted to generate revenue if the funds are used to support their mission instead of being distributed to individuals. This is because generating revenue helps sustain operations, fund programs, and expand services to better serve the community.

For-profit businesses generate revenue to maximize earnings for owners, shareholders, paid employees, or investors. In contrast, not-for-profit social organizations generate income to support their operations, but no portion of the earnings can be paid out as profit to individuals. Any surplus beyond operating expenses must be reinvested into the organization to strengthen its financial health and further its mission.

Generating revenue allows a not-for-profit to:

• Expand Programs and Services: Additional funding enables the organization to reach more people and enhance its impact.
• Maintain Operations: Revenue covers administrative expenses, staff salaries, facility maintenance, and essential resources.
• Invest in Future Growth: Funds can be used to launch new initiatives, upgrade technology, and create sustainable funding strategies.
• Reduce Dependency on Donations: A diversified income stream provides financial stability and lessens reliance on external donations.

Ensuring Compliance and Transparency

Not-for-profits must accurately track and report revenue to comply with Internal Revenue Service (IRS) regulations and maintain tax-exempt status. If an organization generates income through activities unrelated to its mission, it may be subject to Unrelated Business Income Tax (UBIT). Keeping clear financial and operating information and records and aligning revenue-generating activities with the organization’s purpose helps maintain transparency and long-term financial sustainability.

Common Revenue Sources for Not-for-Profits

Not-for-profit organizations can generate revenue through various channels while adhering to tax-exempt regulations. These income streams help sustain daily operations, support programs, and expand outreach efforts. Below are some of the most common ways these charitable organizations bring in funds.

Donations and Grants

Many not-for-profits rely on contributions from individuals, businesses, community organizations, and foundations to fund their work. These can include:

• Individual Donations: One-time or recurring contributions from private individuals, including major philanthropist gifts.
• Corporate Donations: Financial or in-kind support from businesses, often as part of community engagement initiatives.
• Foundation Grants: Funding from private or community foundations to support specific projects, research, or general operations.
• Government Grants: Federal, state, or local funding for designated programs, services, or community projects.
• Crowdfunding and Online Fundraising: Digital platforms like GoFundMe, Kickstarter, and nonprofit-specific services like Classy or GiveLively allow organizations to raise money from a broad audience.

Membership Fees

Some not-for-profits use a membership model where individuals or organizations pay dues in exchange for benefits, such as access to events, educational resources, or networking opportunities for new employees. Examples include:

• Museums, Zoos, and Cultural Institutions: These not-for-profits often offer memberships that include free admission or exclusive content.
• Professional Associations: These groups collect dues in exchange for industry resources, certifications, and continuing education.
• Advocacy Organizations: These orgs often provide tiered memberships with access to reports, research, or policy updates.

Program and Service Fees

Many organizations charge for programs or services. Some not-for-profits do the same, but offer activities provide services that align with their mission and reinvest the money generated into serving that mission. Programs and services include:

• Educational Programs: Fees for workshops, training sessions, or certification courses.
• Healthcare Services: Sliding-scale fees at nonprofit clinics or counseling centers.
• Facility Rentals: Organizations with event spaces or meeting rooms may rent them for private use, such as conferences or weddings.

Product Sales

Selling goods can be an effective way to sell products and raise funds, especially when the products align with the organization’s purpose. Not-for-profit organizations often generate revenue by selling:

• Charitable Merchandise: T-shirts, tote bags, or mugs featuring the organization’s logo to increase awareness and support fundraising.
• Publications and Educational Materials: Books, research reports, or online courses related to the organization’s work.
• Fair Trade or Artisan Products: Handmade crafts, jewelry, or textiles sold by social enterprises to support artisans in underserved communities.

Investment Income

Some but not all nonprofits not-for-profits generate passive income through investments, allowing them to fund programs over time. While investment income is generally allowed, religious organizations must comply with IRS regulations and avoid financial risks that could impact their otherwise tax-deductible and -exempt status. These investments may include:

• Stocks, Bonds, and Real Estate: Organizations may invest in financial markets or properties to generate additional revenue.
• Endowments: Funds invested to provide long-term financial stability, with returns used to support operations.

Sponsorships and Corporate Support

Businesses often contribute financial support to not-for-profit organizations in exchange for recognition, advertising, or cause-related marketing opportunities. Common sources of corporate sponsorships and revenue support from businesses include:

• Event Sponsorships: Companies fund nonprofit events, such as fundraising galas or awareness campaigns, in exchange for branding opportunities.
• Cause Marketing Campaigns: These involve businesses donating a percentage of sales from specific products to the organization’s mission (e.g., “Buy One, Give One” models).
• In-Kind Contributions: Businesses donate goods or services instead of money, such as food, office supplies, or professional services offered at no cost.

Legal Considerations for Not-for-Profit Revenue

While not-for-profit organizations can generate income, they must follow legal and tax regulations to maintain their tax-exempt status and avoid unnecessary financial liabilities. Careful financial planning and compliance with IRS rules help ensure revenue supports the organization’s mission rather than creating tax burdens or legal risks.

IRS Regulations on Unrelated Business Income (UBIT) and Taxable Activities

The IRS defines Unrelated Business Income (UBI) as revenue earned from or conducted fundraising activities for charitable purposes that doesn’t directly support an organization’s stated mission. If a not-for-profit regularly engages in such activities for charitable purposes, the income may be subject to UBIT and must be reported on IRS Form 990-T.

Examples of Taxable Income:

• Retail Sales Unrelated to Mission: A nonprofit animal shelter selling pet products such as toys, food, and accessories that are not directly related to its rescue and adoption efforts.
• Commercial Food Services: A museum operating a café that serves the general public rather than being limited to educational programs or mission-related events.
• Advertising Revenue: A nonprofit publishing a magazine that includes paid advertisements from commercial businesses, rather than content solely focused on its mission.

Some types of sales tax amount of revenue are exempt from the tax returns UBIT, including:

• Passive Investment Income: Revenue from dividends, interest, annuities, and rental income from real estate, provided the property is not financed with debt.
• Volunteer-Operated Business Activities: If a business activity is conducted entirely by volunteers with no paid staff involvement, the income is generally exempt from UBIT.
• Mission-Driven Research Revenue: Payments received for research conducted for public benefit, such as scientific studies or medical research shared with the public, may not be subject to UBIT.

Maintaining Tax-Exempt Status by Aligning Revenue-Generating Activities with the Organization’s Mission

To avoid UBIT, not-for-profits should focus on revenue-generating activities contributing to their mission. The IRS evaluates whether the money received from an activity directly supports an organization’s purpose or public good or primarily serves commercial interests. If the latter applies, the income may be subject to taxation. Some examples of mission-aligned revenue include:

• Educational Sales for Program Support: A literacy program selling educational books, learning materials, or workbooks that advance its literacy initiatives and directly support its educational programs.
• Program-Related Admissions Fees: A historical society charging admission for guided tours, lectures, or interactive exhibits that enhance historical preservation efforts and further public education.
• Healthcare or Social Services Fees: A nonprofit medical clinic collecting fees for sliding-scale healthcare services provided to underserved communities as part of its mission.

Potential Risks of Excessive Unrelated Business Income

Generating too much unrelated UBI or failing to report taxable revenue can create financial, operational, and reputational risks. Most significantly, if a significant portion of a not-for-profit’s revenue comes from activities that do not align with its mission, the IRS may reclassify the entity as a taxable business rather than a nonprofit. This could result in the loss of tax-exempt status, impacting the organization’s ability to receive tax-deductible donations and grants.

Failing to properly report and pay UBIT can lead to financial and legal penalties, including IRS fines, interest charges, and increased risk of audits. Nonprofits that do not comply with tax regulations may also face costly legal disputes or the need for corrective actions that strain resources.

Excessive unrelated business activities can also lead to reputational damage. If an organization appears to prioritize commercial ventures over its nonprofit mission, donors, grant funders, and stakeholders may question its commitment to its stated purpose. This could result in reduced public trust and decreased funding opportunities.

To reduce legal, financial, and tax risks, not-for-profits should evaluate income-generating activities proactively. Before launching a new revenue stream, conducting an IRS compliance assessment can help determine whether the income will be subject to UBIT and whether adjustments are needed to maintain tax-exempt status.

For organizations that generate significant unrelated business income, establishing a for-profit subsidiary can help segregate commercial activities from nonprofit operations. A separate taxable entity allows the nonprofit to maintain its tax-exempt status while still benefiting from revenue-generating ventures.

Regular compliance reviews are essential to staying in good standing with the IRS. Nonprofits should routinely assess financial records, IRS guidelines, and tax obligations to ensure accurate reporting and adherence to nonprofit tax laws.

Start Generating Revenue for Your Not-for-Profit Organization

Navigating the complexities of revenue generation while maintaining tax-exempt status requires careful planning and compliance with IRS regulations. Not-for-profit organizations must ensure that income-generating activities align with their mission and avoid excessive unrelated business income that could jeopardize their tax-exempt designation. Proper structuring, financial transparency, and adherence to legal requirements are essential for sustaining operations and expanding impact.

Chisholm Law can help your not-for-profit develop sustainable revenue strategies that comply with tax laws and support long-term financial stability. Whether you need guidance on structuring income streams, filing IRS tax forms, or addressing compliance concerns, our team is here to assist. Contact Chisholm Law today to discuss how we can help your organization generate revenue while protecting its tax-exempt status.

*Past results do not determine future outcomes