Non-profit businesses play a large role in the American economy. In this lesson, learn about non-profit business, the benefits of this type of business, the elements included in a non-profit business plan, and how to get expert advice on how to starting a non-profit business.
What Is a Non-Profit Business?
A non-profit business, also known as a not-for-profit organization, is a tax-exempt organization formed for religious, charitable, literary, artistic, scientific, or educational purposes. It is an incorporated business from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs. A few well known non-profit organizations include Habitat for Humanity, Red Cross, and United Way. There are many types of not-for-profit organizations, however, the most common is a 501(c)3.
There are several benefits of becoming a 501(c)3, including:
Exemption from federal income taxes
Exemption from the Federal Unemployment Tax Act (FUTA)
Ability to accept contributions that are tax-deductible to the donor
Eligibility for government and foundation grants
Possible eligibility for some local and state tax exemptions
Business Planning for Non-Profit Organizations
Business planning is a very similar process for both non-profit organizations and for-profit businesses. The business plan is used to help you determine the feasibility of your business idea, potentially attract capital for a start-up, and provide direction.
In essence, all business plans have the same basic shape. Just like a for-profit business, the business plan for a non-profit organization will include a cover sheet and table of contents followed by an executive summary, which explains the concept of the organization, its history, its mission, and why it deserves funding. A non-profit has both a social and a financial mission. Next, the business plan is generally broken up into two sections: information about the organization and financial information.
Information about the Organization
The section on information about the organization is where you expound on the concept and customer portion of the plan. What is the history of the organization? Who founded it? When? Why? Where is it located? What products, services, and/or programs are provided, and to whom?
Evidence that a market exists for your business is much more convincing than an unsubstantiated claim or guesswork. Present facts you have gathered on the size and nature of your markets. Identify your target market. What are the market trends? How will you promote your business to your audience? Who is, can, or might provide the same services as you? These are your competitors.
What are the internal strengths and weaknesses of the organization? What strengths can you build on? What do you need to change? No nonprofit is without strengths and weaknesses, but you must know what they are in order to do something about them.
Board governance is where the business plan for non-profit and for-profit businesses differ the most. For-profit organizations are not required to have a board of directors. However, non-profit organizations must have a board of directors to oversee all legal and financial activities of the organization. Members of the board of directors are volunteers who oversee decisions such as incorporation, fundraising, hiring an executive director, and setting personnel policies.
Initially, the non-profit will consist of the Executive Committee and the Executive Director. As the non-profit becomes bigger, the rule of thumb is that no more than five people should report directly to the executive director without good cause. If the non-profit will have employees, what will their job descriptions look like? What are the education and/or skill requirements needed for the job?
The non-profit world turns on personal relationships, so it is important to seek out opportunities to work with others. What agencies can you work with to achieve your mission? Which agencies might be allies in the future?
The financial information section is where you quantify the costs of running the non-profit. It has four major sections: the balance sheet, revenue projections, income statement, and cash flow projections.
A balance sheet is a snapshot of the finances of the organization at a given time. The balance sheet of a non-profit business differs from the balance sheet of a for-profit organization in one important aspect: funds are divided into 'unrestricted' and 'restricted' categories.
In the most general sense, what revenues can you assume for the coming year from fees, grants, donations, and fundraising events? Will you have members who pay dues? Will clients pay a fee for service? Determining your revenue can be as tricky for a new non-profit as for any start-up the first time around, but experience will make the next projection more accurate.
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The income statement measures whether you have made a profit or suffered a loss during a stated period. Income is a measure of what comes in over a given period, usually a year. Some expenses will be spread over the year, such as rent, insurance, salaries, etc. while others will be more time specific.
Cash comes in from a very limited number of resources and goes out through many channels. Keeping the inflow and outflow balanced is at the heart of financial management. The aim of this cash flow management is to always be liquid, which means assets can be converted into cash easily on a short notice, without losing value.
Get Expert Advice
Once you've determined that there is a need for your service, developed a business plan, presented your plan to potential investors, and secured the funds necessary for starting the operation of your business, you should solicit the help of professionals, such as a lawyer, accountant, or insurance agent, to help you complete the final steps of incorporating and launching your new venture. You can do much of the work yourself or with the help of a subject-matter expert
However, applying for tax-exempt and/or tax-deductible status is more complicated, and you would benefit greatly from the advice of a lawyer who understands nonprofit matters. It is very important that your filing for tax-exempt and/or charitable status be very accurate about the purpose and program of the new organization. Otherwise, it might not get special tax status at all.
In addition, a banker can help you open an account that meets the needs of your business. An accountant or other financial expert can help you set up a basic bookkeeping system, and an insurance agent can help you determine the need for insurance policies, such as liability and property insurance, also worker's compensation, health, and life insurance benefits for when you hire staff.
A non-profit business is a tax-exempt organization formed for religious, charitable, literary, artistic, scientific, or educational purposes. Its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization and used for its own expenses, operations, and programs. A few well known non-profit organizations include Habitat for Humanity, Red Cross, and United Way. The most common type of non-profit is a 501(c)3. There are several benefits to becoming a non-profit, including exemption from federal income taxes, the ability to accept contributions that are tax-deductible to the donor, and eligibility for government and foundation grants.
A non-profit business plan helps determine the feasibility of your business idea, potentially attract capital for start-up, and provide direction. It is generally broken up into two sections. First, the information about the organization answers the questions of what the history of the organization is, who founded it and why, where it is located, and what products, services, and/or programs are provided. Next, the financial information deals with things such as the balance sheet, or a snapshot of the finances of the organization at a given time, and the income statement, which measures whether you have made a profit or suffered a loss during a stated period. Once you've determined a need for your service, developed a business plan, and secured the necessary funds, you should solicit the help of professionals, such as a lawyer, accountant, or insurance agent to help you complete the final steps in incorporating and launching your new venture.
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