Every so often, I’m listening to a podcast where someone makes some kind of hallowed reference to a ‘non-profit’. This is irksome to me. Somehow, the suggestion is always that being a non-profit means that you’re a ‘good’ organisation, while all those other for-profit businesses are nasty gold-diggers #vampiresquiddingonthefaceofhumanity.

What Does It Mean To Be Non-Profit?

Being a non-profit organisation does NOT mean that the organisation makes no money. A non-profit can make heaps of money.

What being “a non-profit organisation” actually means is that the organisation/company has managed to register itself as one. In theory, the company has demonstrated that its primary motive is something other than ‘profit-making’. And in its corporate structure, there are no shareholders or owners.

In practice, this means that any accounting profits are usually kept in reserve for future use by the organisation/company, rather than being dished out as dividends.

Because of these two characteristics, non-profits generally get special tax status (ie. no tax on any profits they make).

Some examples: charities, churches, hospitals, schools, universities…

All the tax breaks

The real distinction between a for-profit and a non-profit company is how-much-tax-they-should-pay.

And if you think about it, that’s an unnecessary point if a non-profit makes no profit to be taxed in the first place, right?

But many non-profits are hugely “profitable” (like hospitals), and they’re often the recipients of generous donations (I’m yet to hear of a university that doesn’t send out pleading donation requests to its alumni). So they end up holding massive reserves of funds. Many tax codes like to call those “surplus revenues”. And those surpluses have to be invested and managed until the organisation has need of them in the future.

Sidebar: whenever you hear the word “endowment” used in reference to universities, hospitals and the like – just know that it’s usually referring to the swimming pools of coinage in which non-profit executives are contentedly doing breast-stroke.

And while I’m sure that there are non-profits in the world who use all their money for their declared legal purpose, non-profits can also be used as vehicles for the life-enrichment of their board-members and staff members. You know: generous retirement packages, lots of business class trips to conferences in exotic places, expat-style living, etc.

I mean, I don’t want you to think that I disapprove of all that. I’m all for finding work-life balance.

But even so – the profitlessness of these organisations is generally a tax-law-semantic illusion.

Just saying.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.