How Do Non-Profit Organizations Work?

We often throw around the term “nonprofit” without knowing what exactly they are or how they work. Myths about nonprofits abound. Why are they called “nonprofits” when some pay substantial salaries? What are nonprofits doing with all that fundraised money anyway? Why are nonprofits tax-exempt?  What is that nice office all about?

Let’s take a look at the facts.

First, what is a nonprofit organization (NPO)? Nonprofits are government-recognized organizations set up to further a particular social or welfare cause. They can work in religious, scientific, research or educational sectors. However, one fact that differentiates them from business is that NPOs do not pay income tax on their received money.

In addition, nonprofits are required to use their surplus revenues to achieve their stated objective. Funds cannot be given as bonuses to shareholders, leaders or members as with businesses.

In order for a nonprofit to maintain its status, it is held accountable for its expenditures and must prove that it is actually fulfilling its intended goal. In addition, nonprofits must be viewed as ethical in order to maintain the trust of those who support them. In this way, donors will continue to give the needed funds and volunteers will continue to help the nonprofit’s mission. In other words, public confidence in any nonprofit is vital for its success.

Confusion can arise when people discover that staff working for a nonprofit make good salaries. In fact, a quick Google search can find that many CEOs of nonprofit organizations make substantial salaries.

Every nonprofit must find a balance between paid workers, who are qualified staff committed to maintaining the organization, and volunteers, who may work equally hard but may not be quite as dedicated or reliable.

Finding the correct amount to spend on salaries and overhead costs (office space, bills, travel expenses, printing, advertising fees etc.) are some of the greater challenges nonprofits face. After all, when people donate to their hard earned funds to a charity of their choosing, they want to know that their money is being used to help those in need and not just line the pockets of staff.

On the other hand, in order to attract qualified workers, salaries must align with accepted standards. In addition, when inviting wealthy donors to an office, the work area must be professional, presentable, clean and inviting.

In order to track nonprofits and ensure that they can maintain their status, the United States government as well as the IRS, which regulates tax-exempt status, has laws which must not only be followed but are also checked yearly for compliance.

These laws include defining what are reasonable salaries for staff who work at a nonprofit as well as reasonable expenditures on overhead costs. The best nonprofits are able to find a healthy balance between salaried employees (and define such salaries), volunteers and overhead costs.

If there are discrepancies as per the IRS, organizations can be penalized. Individuals considered taking excessive pay can also be fined. For instance, if an organization raises $125,000 a year and a staff member’s salary is $100,000, red flags will be raised. On the other hand, if a salary is commensurate with funds raised, there is less concern by the IRS.

As some nonprofits employ thousands of people and raise millions of dollars a year, it is not uncommon to find CEOs or Executive Directors of these larger nonprofits reaping a hefty salary. Is that always a questionable practice? Absolutely not. But that has not made them immune to complaints.

For example, the salary of Rabbi Yechiel Eckstein, Founder and President of the International Fellowship of Christians and Jews (IFCJ), is considered a controversy. IFCJ raises about $140 million per year to provide help to impoverished individuals, families and the elderly living in Israel and the former Soviet Union. Rabbi Eckstein has come under fire for what appears to be an excessive salary and pension plan.

The Wall Street Journal reported that Eckstein’s base salary is about $512,000 per year. Plus, he receives an additional $544,000 contribution to his retirement plan. However, upon further study, one finds that the Rabbi only recently started to receive provisions for his retirement after years of dedicated service to IFCJ, doing the important work of helping and encouraging people to move to Israel, supporting poor Israeli soldiers, terror victims and much more.

Additionally, when one considers the amount of travel he puts in a year, the number of programs he arranges and oversees, the number of individuals and families he helps, as well as the fact that IFCJ has maintained its nonprofit status since 1983, this situation becomes more understandable.

When comparing the compensation for for-profit CEOs, which can be nearly $10 million in recent years according to The Chronicle’s newly updated database, the non-profit salary seems quite small.

With IFCJ having raised more than $1.3 billion towards its mission since its founding, the numbers seem to align with expectations. Also, IFCJ states that their fundraising expenses have remained steady even as their donations have increased, with only 17 cents per dollar being used for expenses.

As Limor Bar-On, a communications adviser who has worked for Eckstein stated, “This is a person with a huge passion and great love for the people of Israel. In my opinion, he is entitled to every dollar he gets.”

In summary, the term “nonprofit” is a bit of a misnomer. Nonprofits actually must make a profit in order to sustain their mission. Salaries can be paid and overhead costs are covered through raised funds.

The main difference between for-profit and nonprofits is that nonprofits cannot distribute funds to individuals as a “private benefit.” The goal of a nonprofit must be something for the greater good. CEOs are able to make a more than livable wage, and as long as expenditures are in line with donations, having nonprofits in action makes the world a better place.

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