Case Study MS190

Non-Profit Sector

 

Case author

Professor Charmi Patel, PhD, MSc, BA

Learning objectives

After you completed this course module, you will be able to conceptually solve holistic management problems within a case study of the non-profit sector.

Topic

Anita Fernandez, the president of the Association for the Save the Childhood Movement (Bachpan Bachao Andolan—BBA) and Lena Idriss, the general manager, prepared for a meeting with the rest of the board, during which they would discuss BBA's future. BBA an Indian association that supported women and young children involved in child labor, had been founded in the 1980 to promote children's and adult education as well as women's empowerment. BBA had started its activities with a single workshop where women could learn various knitting and embroidery techniques in order to sell the products and support their families. Soon after, BBA's mission had been extended into improving general living conditions of the underprivileged as well as creating jobs and enhancing education. Since its inauguration the organization had trained over 6,000 women across India and supported thousands of children (through schools and youth centers that are financed through BBA's educational scholarships). BBA had also provided social and medical support for hundreds of the elderly and granted microcredits to hundreds of women and children. BBA had established a well-respected name as a creator and manufacturer of high-end, superior quality chikankari embroidery products. These handcrafted products were sold in local shops in big cities such as Delhi, Mumbai, and Bangalore and had also been exhibited in prestigious shows such as at the Institut Du Monde, the UNESCO headquarters in Paris, the Museum of Mankind in London, and the Craft and Folk Art Museum in Los Angeles...

Workload units 2
Reading extract Non-Profit Sector Case Study

 

Some introducing thoughts on the non-profit sector

Despite the name, the non profit sector as a whole is one of the major economic drivers in all municipalities. whether you are referring to private hospitals, day care centers, social service providers, theaters, museums, colleges or clinics, dealing with a non profit business is not much different from dealing with a for profit business except in name and a few key procedures.

The non profit economy gives life to many types of companies that might have trouble surviving in s purely capitalistic landscape. For the most part, non profit industries are given their status through society's determination that certain industries provide an indispensable service that improves lives and creates solid employment subsidies and diversity of product.

 

The Dominance of Nonprofits in Certain Industries

Many industries such as health have much more than just a healthy number of non profit firms - the sector and many others like it are actually dominated by non profits. In sectors such as health, the majority of employment goes through nonprofit organizations, meaning that there is a great deal of political power as well as economic power that is created by these companies. This is something to consider when you do business, especially accounting business, with an influential nonprofit organization.

 

Protections that Nonprofit Businesses in Contested Sectors Receive

The tax-exempt status is the most well-known of the protections that nonprofit businesses enjoy; however, it is far from the only one. In most cases, it is not even the most important benefit.

In most cases, the most important reason to take a company nonprofit is to fulfill a requirement for obtaining funds from government agencies as well as certain angel investors and private foundations.

 

The Benefits of the Tax Exempt Status of a Non Profit Organization

The tax-exempt status of nonprofit corporations, also known as 501(c)(3) status, exempts a company from having to pay any federal and state income taxes. In some cases, local municipalities may still require that a nonprofit organization pay taxes. This is actually the case for many locally founded churches with a direct effect on the local economy.

If the company relies on donations, such as a church, applying for and receiving 501(c)(3) IRS protection keeps that company from having to pay income on the taxes that it receives from those people. An added benefit to those who would donate is the ability to remove the amount of that donation from taxable income. This is also used in many cases to protect the income of the proprietors of the company, who can also be seen as donors in the eyes of the law.

Certain types of nonprofit status corporations also completely protect the proprietors of the business from the debts and other obligations of the corporation. This status can be known as limited liability; however, it is different from the limited liability status that many for profit corporations choose to take their business under.

 

The Political Reasons to Take a Company Nonprofit

If a company undertakes a political legacy that might provoke legal quarrels, forming a non profit organization is an accepted way of protecting the assets of the proprietors from any backlash that political enemies may try to undertake. In return for certain federal protections, non profit companies agree to limit their political advocacy in some cases.

 

Other Reasons to Take a Company Nonprofit

If a company is real estate intensive, taking it non profit can save it a great deal of money. Non profit organizations receive property tax exemptions from the county assessor. It may also be called a "welfare exemption." Non profit companies also receive special postal rates that keeps their expenditures on mailings low. All of these factors must be considered when assessing the financial health of a nonprofit organization. If you are handling a company that is trying to decide whether or not to take itself nonprofit, these seemingly small factors may actually be very important aspects of the decision-making process.

 

The Reason for Financial Professionals in the Nonprofit Industry

There is a great deal of increased competition in many sectors that are currently dominated by nonprofit organizations. For-profit organizations have successfully leveraged their political clout to remove some of the protections that nonprofit organizations traditionally have over for-profit organizations. Between 2003 and 2013, for-profit businesses in many nonprofit dominated sectors have exceeded the growth rate of nonprofit organizations in those sectors.

Because the barriers to entry in nonprofit dominated industries are very high, the for-profit businesses that are entering the fold have a great deal of money to spend. They are successfully luring away some of the best employees from nonprofit organizations with higher salaries, more benefits and other niceties. In order to overcome the many protections that nonprofit organizations provide to their employees, these for-profit businesses have had to spend a great deal of money. This means that they are certainly looking to make more in the coming years.

 

Employment in Nonprofit Dominated Sectors

For-profit employment in nonprofit dominated sectors is growing at a rate that is much higher than the rest of the economy in the recovery of 2013 and on. As a matter of fact, employees working within for-profit corporations in nonprofit dominated sectors are leading the charge when it comes to new employment, with health professionals being at the top of the list.

Headhunters for for-profit organizations also have an eye towards executives who have led successful nonprofit organizations. In most cases, executives of nonprofit organizations have created relationships that would benefit a for-profit company even more than the nonprofit. Many new companies find the connections with politicians and high-ranking government financial executives worth their weight in gold. They are more than willing to shell out the extra salary that it takes to solidify these connections over the long term.

 

Applying for Government Money and Private Grant Money

One of the most important reasons to create a nonprofit organization is the ability to apply for grant monies that are not made available to the general public. For the most part, these monies are not loans; however, in some cases, they carry less prohibitions than loans of the same size and caliber.

 

Different Types of Nonprofit Businesses within the Nonprofit Economy

In order to best service the company that you are working for, you must make first a distinction between unincorporated and incorporated nonprofit organizations. The application that a company puts in for for nonprofit status has nothing to do whether it is incorporated or unincorporated.

If a company is incorporated as well as being a nonprofit organization, you must learn how to navigate the ins and outs of both types of companies. In order to best service an incorporated nonprofit organization, you will need mastery of the overview discussed here as well as a working knowledge of corporate accounting and corporate law.

Incorporated nonprofit organizations must follow the guidelines that are set up by the government for corporations. In order to remain in good standing with the government, it must keep corporate records, have separate bank accounts for all expenditures and prepare minutes for all of its meetings. Nonprofit corporations also may not distribute any types of profits to its members.

Nonprofit corporations that are fully incorporated will also have a board of directors. This group of people will make the final decision on anything that concerns the company. In order to direct the financing efforts of a corporation that is nonprofit, you will have to interface with the Board of Directors quite frequently along with the Executive Director. The Executive Director is similar to the CEO position in a for-profit corporation.

 

Economic Reasons to Remain Unincorporated As a Nonprofit Entity

Depending on the unique situation of a particular entity, it may be in the best interests of that entity to remain unincorporated even as it elects itself to nonprofit status.

A company may simply be too small to elect for incorporation. If the company is not able to scale to a certain level, there is no benefit to all of the tax exemptions and protections that nonprofit incorporated entities receive. As a matter fact, a company may end up paying more out in government fees than it ends up saving in taxes.

In certain states, it may also benefit a nonprofit entity to remain incorporated if it is receiving donations from people. It will be your job to determine whether remaining unincorporated or incorporating fully in this situation will benefit the company more.

 

The Nonprofit Economy

There are many laws and exemptions to navigate if you are doing work for a nonprofit organization. The job is made harder because of all the new competition that is coming in from the private sector into industries that were dominated by nonprofit corporations in the past. In order to fully assess the nonprofit economy and how you can best navigated for the benefit of your clients, you must have a working knowledge of state and federal law and how the above exemptions will help a company to save money on fees and expenditures so that it can pass it on to its employees and back into the company.

 

Return to Case Studies (MS modules).