The biggest challenge that nonprofit organizations face is the ability to get their cause across people. In order to do this successfully, they need funds to implement their marketing campaigns, which is another problem they have to face.
Funds are a limited resource to these organizations that don’t intend of making money off their efforts. This is a reason why some charities requested protection from bankruptcy due to rising overhead and dwindling donations.
“When there is not enough money to cover all your bills, it is easy to feel overwhelmed,” according to bankruptcy lawyer Simon Resnik. “Financial distress can also make it difficult to concentrate at work, as well as cause you to avoid social situations.”
The idea of losing funds for your NPO or any organization can set up you up for the fall, especially if you’re not fully prepared for bankruptcy.
But this is just part of the bigger issue that drives NPO out of business, which is why they need to find other ways to build funds so they can execute their plans.
An idea is to institute a revenue-based funding for nonprofit organizations. What this does is investors back small businesses with a financial capital. Investors will get back their capital through regular gross revenue up until the fifth year. Aside from paying up the full amount, the business will also have to pay up a multiple or a cap.
Unlike other forms of loan, revenue-based funding does not get equity of the business, but instead takes a warrant instead.
While this appears to be an option that nonprofit organizations can take to pump life into their floundering finances, this is impossible and forbidden by law. Below are the reasons why..
The inurement prohibition, also known as non-distribution constraint, prevents the organization to distribute the money it earns to individuals that has an interest in the organization. This includes employers, employees, and donors. While this law ensures that profit is not siphoned by insiders, it also puts investors at risk. As a result, revenue-based funding is impossible for this very reason. Investors won’t be able to get back their capital because the law forbids it. If an NPO is proven to have violated this law, they will lose their tax exemption.
Private benefit rule
The inurement prohibition is in line with the private benefit rule, in which nonprofit organization operate for qualifying exempt purposes (charities, causes, etc.). If an organization serves for the benefit of an individual or organization not part of the exempt purposes, then these transactions or transfer of funds are considered taxable. In relation to investors and donors, they will and should not get their supposed capital back according to this rule.
Unrelated business income rule
This type of income is defined as the amount received that go over the qualified asset account limit. Income received from unrelated parties such as investors should not be set aside as these are taxable.
Final thoughts: By crossing our revenue-based funding from your list of possible avenues to build finances, nonprofit organizations much look for money-making alternatives to sustain their cause. It is just a matter of being creative and coming up with a ingenious strategy to drive more donations that you don’t have to pay back.
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