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Nonprofit organizations do not have shareholders. Therefore, they raise capital through fund-raising activities. Funding sources of nonprofit organizations include individual and corporate donations, grants from private and government funders, fees for services, and investment.
Gifts and Donations
Gifts and donations come from individuals, companies, charitable trusts and foundations. Usually, they are considered private funding that nonprofit organizations can use for whatever purpose related to their vision and mission. Gifts and donations are tax deductible. Some examples of gifts and donations include, but are not limited to:
Bequests: This is a donation made on the donor's death, not affected by estate tax. Bequests are like donations, but differ in the sense that they happen only when the donor passes away; then the value of the donation is removed from the donor's taxable estate.
Charitable remainder trust (CRT): The asset being donated is removed from the donor's estate and placed in a trust, thus removing the asset from the donor's taxable estate. Once the trust beneficiaries get up to 20 years' worth of income, the amount left over goes to the charity. There are two types of CRTs. There can be a charitable remainder annuity trust (CRAT), which helps ensure that the beneficiaries receive a fixed amount of income each year. The donor sets up a certain amount that the trust will pay the beneficiary each year, but must have a minimum payout of 5%. The payments are fixed. If the interest amount is not enough to cover the payment, the CRT can be a charitable remainder unitrust (CRU). In that case, the donor gives the same percentage of the trust each year to the beneficiaries. This amount can change based on the current value of the assets.
Grants are money that a nonprofit organization receives from private foundations, public agencies, or other grant makers, which does not have to be repaid. However, the grant money received is tied to specific goals, objectives, and outcomes. Grants always come with the conditions under which the money can be spent.
Nonprofit organizations can borrow money to start income-generation activities, such as a social enterprise. Borrowing can take the form of debt finance that must be paid back. Some nonprofit organizations take advantage of the opportunity for equity finance, in which an investor takes a risk by making money available to a business with the expectation that the reward will be shared. Usually, it is very difficult for nonprofit organizations to borrow money because of their very not-for-profit nature. However, some financial institutions are open to consider borrowing requests from nonprofit organizations.
Nonprofit organizations can sell goods and services to members, or even to the public, in order to generate income for their activities. For example, a nonprofit organization can organize an event and sell tickets, or produce a publication to sell, or provide consulting services.
A donor-advised fund is a charitable instrument through which a nonprofit organization administers charitable donations on behalf of an individual, a family, or an organization. The advised-donor fund provides relief to the individual, family, or organization by not having to incur the administrative expenses of creating a private foundation. Donor-advised funds are new and allow the donors to have tax advantages while directing the use of their donation.
Fee for Service
Some nonprofit organizations provide services for a small fee. This is the agreed-on money paid for services provided. There do not have to be contracts or expectations of future services, and the cost for services can be driven by market trends and /or competitors or similar organizations.
Nonprofit organizations invest in for-profit-like activities in order to generate additional income to support their activities. Investment can be made in pension funds, self-insurance funds, or endowment funds.