The not-for-profit business model is unique. Most traditional businesses strive to make a profit for their owners. Instead, a not-for-profit’s efforts are not focused on the financial benefit of any person or board.
Instead, any and all money earned by or donated to not-for-profit organisations is used to keep them running and help them pursue their mission. While this may seem counteractive, their work is very important. Usually, their goals revolve around supporting a cause, activity, or the community. They aim to make the lives of those in need better, relying heavily on donations to make this work possible.
The total number of UK not-for-profits is around half a million. This number continues to grow, proving the popularity and necessity of these organisations. If you’re thinking of starting up your own not-for-profit - then you would benefit from knowing the various pros and cons that come with them.
Advantages of Not-For-Profit Organisations
Besides the positive work they do, there are many other advantages that come with not-for-profit organisations. These include:
Doing a Good Deed
This is perhaps the biggest and most obvious advantage of working in the not-for-profit world. The sense of personal fulfillment from making a positive difference in the world is the entire reason such organisations come to fruition.
While some people are simply salary-driven, others enjoy getting more out of their career. Being a part of a not-for-profit makes people feel like they are part of something bigger. By founding this type of organisation, it gives people the chance to solve a serious problem and change society for the better.
From a PR perspective, people love a heartfelt story that resonates with a personal matter. This can lead to recognition, which leads to more exposure, and more benefits.
Employee Commitment
Often, the people involved in running the not-for-profit will be highly invested in its success. This may be due to personal reasons, for example if they are supporting a cause close to their heart. Or it may be because people are often highly motivated by intrinsic rewards. These can include: personal growth, helping others, or earning respect.
Whether it be an employee or a volunteer, if they care about the not-for-profit’s purpose and values, then this is a huge advantage when it comes to making real change in the world.
Plus, people with a personal interest may have a unique understanding of the cause, helping the not-for-profit deliver more meaningful work to its beneficiaries.
Financial Benefits
Not-for-profits are eligible for a range of financial benefits that do not apply to traditional businesses because they work towards the public good.
The organisation must first be recognised by HM Revenue and Customs (HMRC), which can be done by filling out a form online. Once registered in the UK, not-for-profits can benefit from financial reliefs like exemption from corporation tax and income tax for trustees.
You can also claim tax back, for example if it has been deducted on bank interest or donations.
To keep it simple, not-for-profits do not need to pay taxes for the following:
Donations
Profits from trading
Rental or investment income e.g. bank interest
Profits when you sell or ‘dispose of’ an asset, like property or shares
When you buy property
These are great benefits as they reduce stress, strain and a lot of paperwork for the owners. Yet, it is important to note that not-for-profits may need to pay tax if they use income on things not related to the organisation. This is often regarded as ‘non-charitable expenditure’.
Disadvantages of Not-For-Profit Organisations
While there are many benefits of not-for-profits - they aren’t without disadvantages. From funding issues to social pressure, their survival is constantly challenged.
Limited Funding
One of the biggest cons of not-for-profit organisations is not having a steady source of income.
While there are many ways they can overcome this, they still have the challenge of applying for grants and building a buzz for fundraisers. This is especially true with the recent pandemic. Not only has it caused restrictions for events, it has also increased competition when it comes to bidding for funds.
When it comes to grant applications, this requires a competent writer who is experienced and offers a high success rate. This service is not always cheap, even with charitable rates. As a result, this can turn the fund development hurdle into a risky gamble.
In fact, it is not uncommon for not-for-profits to be forced to discontinue services when it lacks funding. To stop this from happening, it is vital that not-for-profits have a robust long-term strategy in place to ensure it stays afloat.
Social Pressure
When you provide a service that meets the needs of a certain group, this comes with immense social pressure to remain in business. Especially if the group you are supporting is underrepresented. With not-for-profits, there is a constant fight to have enough funding, resources and time to help those in need. This can lead to stress amongst staff as well as financial strains.
Not-for-profits, particularly when they are starting out, must ensure that every activity aligns with their mission. This is so that they can prove to potential funders and donors that they are serious about the cause. If done well, then they can convert more people into supporters. If not, then it is a sorely missed opportunity as every penny counts.
Public Scrutiny
The financial statements of not-for-profits are subject to public scrutiny. This means that the organisation must make its financial statements available to the general public. While this type of accountability can have its benefits - it can also result in unflattering press coverage, particularly if they are experiencing financial or administrative issues.
Many not-for-profits opt to hire a third-party business to audit their books and operations to ensure compliance with tax codes and industry best practices.
There are always pros and cons for any business type. Yet, by being aware of these and preparing a structured strategy to cover all possibilities - this can make a not-for-profit organisation strong and successful.
At S3 Solutions, we are a team of experienced researchers, analysts and consultants. Our background as community development practitioners is what fuels our approach. Across all of our projects, we seek purpose in our work and want to make a real difference. For more advice, contact us today.