Board Cafe: Alligators in the Sewer: Myths and Urban Legends About Nonprofits

Board Cafe

Alligators in the Sewer: Myths and Urban Legends About Nonprofits

By Jan Masaoka

It is worth noting that some common assumptions about nonprofits are actually more like urban legends. Like the legendary alligators in New York City sewers, these stories have been passed along through so many people they've gained a measure of credibility just by their longevity. In fact, nonprofits can do more, and accomplish more, than is often realized!

Myth: "Nonprofits need to comply with Sarbanes Oxley." Actually only one section of Sarbanes Oxley-the relatively new regulations on corporations-applies to nonprofits. That one section provides for stronger protection for whistleblowers in terms of retribution from the corporation. As this issue of the Board Café goes to press in July of 2005, the Senate Finance Committee is considering a new set of regulations for nonprofits. The Nonprofit Panel, a group convened by the national organization Independent Sector, has developed a proposal to that Committee that can be viewed at Note that federal regulations have not been adopted and are still under consideration.

Myth: "Nonprofits can't make a profit." The IRS guidelines clearly state that profits can't be distributed to nonprofit board members (as corporate profits are to shareholders), but they don't say that nonprofits can't have profits. In fact, surpluses ("profits") are needed by nonprofits to even out their cash flows, to provide reserves for emergencies, and to allow them to pay for equipment, research, staff development, building renovations, and other necessary investments.

Myth: "Nonprofits can't charge for their services." In fact, many nonprofits exist mostly on fees charged, such as nonprofit preschools that charge tuition, or community choirs that sell tickets to their concerts.

Myth: "Nonprofits are poorly managed compared to businesses." It depends which business! Enron? Tyco? WorldCom? In fact, nonprofits often achieve growth rates well above for-profit companies of comparable size, and do so while undercapitalized, highly regulated, and still with the highest of ethical standards.

Myth: "Nonprofits can't lobby." Nonprofits may not engage in any electoral activity-they can't support or oppose candidates. However, they may support or oppose ballot measures (such as for public school bonds or against new immigration laws). In addition, nonprofits may encourage legislators to support or oppose various pieces of legislation-as long as such lobbying activities are an "insubstantial" part of their activities. (more good info at , Charity Lobbying in the Public Interest)

Myth: "A nonprofit budget has to be balanced." In fact, in some years a nonprofit will want to budget for surpluses, such as to create a cash reserve, or to save up for new equipment. In other years the same nonprofit might budget a deficit, for example, to do one-time programs with windfall money, or to invest in a new fundraising director, or a publicity strategy. Over time, the financial goal of a for-profit is to maximize profits; the financial goal of a nonprofit is to sustain sufficient working capital for program continuance and strategic choices. 

Myth: "Nonprofits aren't important economically." Surprisingly, nonprofits generate 6% of the US GDP (gross domestic product), and employ 1 in every 14 American workers. Nonprofits mobilize the efforts of an army: 83.9 million adults volunteering 15.5 BILLION hours each year towards community and public benefit - the equivalent of 7.7 million full time staff. (Just to give a comparative number, the total active military personnel in all services (Army, Navy, Marines, Air Force) total 1.4 million.)

Original publication date: 07/01/2005

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