Precisely becuse it’s a not-for-profit. The purpose is to get in a lot of funds so you can finance many big research projects, NOT to end the year with a pile of cash. Unless, of course, you HAVE a really big project in the pipeline that’s gonna need that pile of cash.
As mentioned earlier, there are ways around the “nonprofit” thing for those willing to play games – the leaders of the organization may decide to just pay themselves stupendous salaries and benefits; or they may give themselves reasonable pay but then get free personal use of houses, offices, vehicles, communications, etc. that are nominally the organization’s (this one’s popular among televangelists).
I’m not quite sure where you’re coming from there. The idea is that, yes, you want to bring in a lot of cash, but you don’t want to spend a lot doing it. It’s not “profit” in the sense of “we will have a surplus at the end of the year,” more a measurement of how effective the fundraising office is. Trustees are much more impressed by a university that raised $4 million on a $250,000 outlay than a university that raised $5 million on a $1 million outlay, even though the second university raised more. (Reason: other departments see budgets. They don’t like to see big advancement budgets. I know, we’re going through this now.)
As for “big projects”–there’s almost always one big project or another in the pipeline, at least nowadays. It used to be, as recently as ten years ago, that universities would run one campaign at a time, with the “silent phase” lasting about two years and the “public phase” lasting three or four. There would then be a breather of a few years before planning the next campaign began.
But now universities are running campaigns right over top of each other. Even relatively small places like the one I work at start planning the next campaign even before the previous campaign finishes up. At some of the big research universities, there might be one general campaign running concurrently with one or more “special” campaigns. I think at one point Penn State was running four campaigns at once (a general campaign, and one each for the Paterno Library, the College of Engineering, and the College of Business). I got a fundraising letter from them a year ago, and there were something like 12 major (as in eight-figure-plus) projects for which they were raising money. In other words, when universities get fundraising dollars, they don’t sit around for long these days.
BOD, directors, Officers and voting members…in effect they ARE owners. They can choose to open/close the business, hire/fire, change the by-laws, etc. Sounds like a very fine line between control and ownership to me.
I did NOT know that once sold the assets beyond debts had to be transferred to another NPO…that seems different than what I have heard. I thought that the assets just had to be accounted for differently within the new company once-off. Their valuations would be established and taxes paid if necessary…maybe there are different ways to handle it…
My main points are to try and get people away from thinking that a NPO is some righteous and good organization that is solely there for the benefit of society - which is what many people think. It is a business tool. Period. It has its advantages and disadvantages and those can be manipulated just like any other business out there. In fact, some argue that they are, well, not harmful, but not helpful. Take a church for example: TONS of money coming in and not a penny taxed. Is that a good thing? Wouldn’t it be nice if you got a bunch of friends together and were able to buy land and buildings and cars, etc and not have to pay any taxes? Ever? Sweet setup, ne? Well, I guess you could, you just have to flip a coin to see who is declared Jesus incarnate and start a church and get your NPO status.
I don’t have time to go into all details here, but at least at the university level most boards of trustees do not have the right to open up close down a college, at least in the case of state-maintained or state-affiliated universities. Those decisions are usually in the hands of the state legislature. I remember, for example, that University of California Monterey Bay was opened by specific fiat from the California state government.
Sure the board can vote to close the business and sell off the assets, but they won’t see any money from it. Nor are there any shareholders to see the money from it.
And yes, you can declare yourself a church and get land and money and cars, but the bottom line is, you’re simply an employee, not an owner. If you then sell the land and cars and try to keep the money, you’ll have to answer to the IRS.
First, if you have a U.S. non-profit entity that has a business unrelated to its tax-exempt purpose, then the profits from the unrelated business subject to Unrelated Business Income Tax which is similar to the tax on a profit-making business.
Second, even if a non-profit sells an asset off (including an asset like a profit-making business), the non-profit may only use the proceeds for a non-profit purpose. None of the proceeds can go to the members (or similar) of the non-profit.
What exactly would be so sweet about that deal? You get a bunch of friends together and buy land and buildings and cars that aren’t taxed and that you don’t own.Maybe you pay yourself a salary- that you pay income taxes on.
And there’s something I think you’re not noticing. A non profit must have a purpose other than making money - it does exist to benefit some segment of society in some way. I’m not saying nobody’s ever been able to scam for a while, but some beneficial purpose has be claimed for an organization to get non-profit status. The allowable purposes for non-profits include (but aren’t necessarily limited to) those organized for charitable, religious, and educational reasons. You can’t start a non-profit organization which has as its only purpose the sale of cookies, even if there aren’t any profits distributed to owners and any excess revenues are used to increase the employees’ salaries. You can, however, start a non-profit organization with an educational purpose and have volunteers sell cookies to finance providing the services.
I stick by my point: semantics. If you are in 100% control of something, then it is yours. You essentially own it. I dealt with this with offshore trusts: An entity was set up to ‘own’ all of an investors assets: his car, boat, beach-front property, etc. He didn’t ‘own’ it! Oh no…not own…but, everything was his. It was a tax-dodge. Just like some NPO’s.
Another analogy: you are possibly reading this from work. Do you own the computer? The chair? The desk? No. But you think of them as “My computer, my chair, my desk.” They are yours to control. You could even use them as currency: “John, I will trade you my monitor for yours and your phone headset…” You could even get someone fired for using ‘your’ equipment. Technically you don’t own them. But in reality you control them. No difference until you are asked to leave.
And the car example is great. Here you can have something that you don’t ‘own’; don’t pay insurance for; you get your gas written off as well as repairs and if you wreck the thing…you get a new one. But you don’t own it…and the problem here is???
The examples given above of huge bonuses hammers the point home. Profits (Earnings) are on the Income Statement. Revenues less Expenses = Net Income. All you need to do to keep something non-profit is to reinvest the earnings above your expenses. BUT, how do you calculate your Expenses? This is where it gets tricky and why you can get around the system. If you increase your Expenses to the point where they meet your Revenues, there are no Earnings. A bonus to a director is an Administrative Expense, NOT a distribution of Dividends which come from Earnings (and Retained Earnings). But the end is the same: somebody gets a lot of money. And their car is an Expense, and their travel to the conventions in Florida are Expenses, and…you get the picture.
Same with selling a company. You have all of these assets, but you can juggle the books to show that in the process of selling off the assets, you ran into all types of Expenses. And boy-howdy if they didn’t just match the last revenues and there is nothing left afterwards…go figure. If not that, why not start another NPO and transfer the assets to it? You might lose your tax status on the new NPO, but you can still control the assets. And once they are fully depreciated and off the books…now you can do what you want with them.
Again, an NPO is a tool. It is wonderful for some charities and good causes. But it is also wonderful for some to use as a legal tax dodge. Yes, people get caught pushing their luck - which I am very happy with. But, a lot of people out their are benefitting unfairly (IMHO most churches; I think churches should pay some form of tax).
Well, there’s benefit and there’s ‘benefit’ to society.
Remember, at the NPO I worked for we were essentially a lobbying agency. As a trade association it was our credo that our (amazingly profitable) industry was the greatest in the US. We used to run articles in the magazine making justification for paying minimum wage to housekeeping and janitorial staff because it was ‘good’ for the industry and world as a whole.
Sure, we were benefitting SOMEONE…but it wasn’t overall society…just the hospitality industry.
Yep, it tends to be Assets vs. Liabilities + Fund Balance on the Balance Sheet
and Expense vs. Revenue = Change in Fund Balance on the Income Statement.
The fund balance can also be referred to as reserves. These may get put toward future capital projects or expansion, but a non-profit sitting on a pile of cash may get the stink-eye. The assumption would be that grants, etc., would be getting used up for their stated missions, but donations are getting hoarded. Again, that could be for future plans, but hopefully there is a responsible Board of Directors overseeing that kind of planning.
Depends on the agency as far as what terminology they use.