Transcription
There are so many people who want to start a nonprofit, but they still struggle to understand exactly what a nonprofit is. Like, what's the difference between a nonprofit and an LLC? Where does the funds come from? How can we use the funds? Can I be paid? What is this tax exemption that I keep hearing about? Can I get a grant? Are grants the only option? Can I charge a fee for my services?
Well, in this video, I'm going to break down exactly what a nonprofit is, break down some of the misconceptions about the nonprofit space, some history about the nonprofit space and how it became what it is today. and lastly, how somebody like you can get started. So, if you've been thinking about starting a nonprofit but unsure how it works, this video is for you.
What's going on, guys? My name is Timothy Wright. We're back again with another video. And in this video, I'm going to do my best to explain exactly what a nonprofit is. So, a nonprofit is simply a legal business entity just like an LLC, an S Corp, or CC Corp. The only difference is this organization is created with a mission intent instead of profit intent. Now, the biggest confusion with that is just because this organization is mission-driven, it does not mean your mission does not need money to drive it. The key ingredient to understand how this works is knowing that you can't actually pocket the funds. You have to continue to use the funds to grow the mission, even if that means paying yourself.
So, what is pocketing the funds? Let's say, for example, I have an LLC and I have a service and I charge $5,000 or $2,000 or $1,000 for it. Someone pays my business for the work that we're doing. The money goes right into my business bank account and then I go to Chick-fil-A and buy me some food with my business credit card or I use the money that's in my business's bank account, transfer it over to my personal bank account and pay my rent with it, pay my mortgage with it, pay my cell phone bill with it. When you're running an LLC, running a for-profit, there's no one telling you that you can't do that. There's no laws to tell you that you can't pocket the funds because that's why an LLC is created.
But when you're running a nonprofit, you can't just pocket the funds. You can't get a donation for $100 and then you use $25 of that donation to go get you some food at Chick-fil-A or Starbucks or whatever it may be. But what you can do is pay yourself a percentage of the money that you just generated as long as it's reasonable. But you'll pay yourself as an employee or independent contractor for the work that you're doing. That's going to be the biggest difference.
So when you become a nonprofit, you also have the opportunity to become a 501c3 tax-exempt organization as well. Most people believe that this is one thing when it's actually two separate things. A 501c3 is a tax exemption code for nonprofit organizations. So, you have to become a nonprofit with your state first. Once you become a nonprofit, you can then apply for your nonprofit to be tax-exempt. Most people think that they're creating a 501c3. Hey, yep. I filed my organizational with my state and now I'm 501c3. That's not the only thing you have to do. Again, the nonprofit status is one thing. Becoming a 501c3 organization is another thing. You have to apply for this organization to be tax-exempt. LLC's, S Corp, and CC Corps, they don't have this opportunity.
Now, with this tax exemption, this allows all the money that you're generating to further produce your organization's mission to be tax-exempt. So, it doesn't matter if you receive $10,000 from John. It doesn't matter if you receive $100,000 from Tim. All this money could be used as tax-exempt revenue as long as it's further producing your organization's mission. This aspect right here is a huge incentive to the reason why people create organizations.
Now, with this tax exemption, this also allows donors to receive a tax deduction on the amount of income they donated as well. So, if someone gives your organization again that $10,000, you're able to provide them with the donor acknowledgement letter, which is going to be your receipt essentially letting them know how much money they just donated to your organization, and then they'll be able to provide that to their CPA or to their accountant and get tax deduction at the end of the year.
Now you see the term nonprofit and in most cases when people see that they believe no money. But that is a huge misconception. Look, I want to provide you some data here. Look, over 1.5 million nonprofits were registered in the US as of 2024 according to the IRS data. And the nonprofit sector contributes to over $1 trillion economically annually. It accounts for about 10% of the America's workforce. And we're in every industry now. health, education, social justice, housing, arts, mental health, environmental, so much more. The term nonprofit does not mean no money. It just means that you can't pocket the revenue. You can pay yourself a percentage.
So, let's say you raise $100,000 as the executive director, as long as it's voted on by the board. That's something that you're going to need to do as well. Vote on how much money that your yourself as a founder can generate from every dollar that's received. I'm going to encourage you go watch the video that I created on how founders can generate revenue, but also how board members can generate revenue as well. That's going to give you a very good outline and understanding of what you need to do to position yourself to be paid as an executive. So, it's clear that money is definitely being raised in this space. Trillion dollars annually, over 12 million people employed, and again, 10% of the Americans work for a nonprofit. But it's important to understand the difference between pocketing the money and being paid for your work.
Now, how do nonprofits actually make money? Spoiler alert, grants are not the largest way for nonprofits to raise capital. I I repeat, grants are not the largest way that nonprofits raise money. So, let's break this down. According to Urban Institute, Giving USA, and the NCCS, over 49% of the revenue comes from program service fees. Program service fees. So, this means fees for your service, tuition, ticket sales. the YMCA, their largest revenue stream is the memberships, hospital services, museum tickets, right? Whatever is a nonprofit, there is a way for you to raise capital for that business. And that is going to be through the program service fees. So maybe you're getting ready to have an event and you want to charge for ticket sales. Maybe at your event, you're going to have four or five different vendors and each of these vendors, you're going to charge them $250 per person to sell any products and programs or services they may offer as well. All these are revenue generating ideas that you could have for your organization and not be 100% relying on grants.
Number two is government contracts and reimbursement. 32%, listen to me, 32% of the money coming from the nonprofit sector is from Medicaid reimbursement, housing vouchers, and state partnerships. So, if you're an organization that is looking to house people, if you're someone that's looking to provide Medicaid, I want you to look more into Medicaid reimbursements. What type of organizations and foundations provide Medicaid reimbursement? This is 32% of the revenue generated in the space. This is something that I'll be spending more time on than grants.
Why is that? That's a good question. Well, I'm glad you asked. Did you know that corporate grants and foundational grants in the last 24 months was less than 5% less than 5% of the money generated in the last 24 months came from foundational grants. Now, why why why is it so important for me to tell you this is because we worked with thousands of different organizations and what I've realized is that people come into the nonprofit space because they think they can get a grant, which you definitely can get a grant, but if you listen to what I'm telling you, this is not the easiest way. This is not the most successful way. And what happens is new nonprofit founders are spending all of their time trying to find a grant when this only makes up 5% of the revenue instead of spending all their time trying to create a program or service that can pay them 49%. Instead of trying to find government contract, instead of focusing on individual giving, which is another 13% of the revenue raised in the nonprofit space. And something now that is growing rapidly rapidly is sponsorships and business partnerships.
These are ways that people in the nonprofit space are gaining success quickly. You know, I get DMs every single day. Do you guys offer grant writing services? You know, we're looking for funding for our building. We need $17 million, right? And it's like, you guys have been open for 3 years and you've only spent all your time trying to find grants and that hasn't worked. Why haven't you tried to pivot? And I know it's only because how we view what we do determines how we do what we do. Our perspective drives our performance. Our perspective drives our performance. So if we want to have a performance shift, we need a perspective shift. Right? So in my opinion, if you're watching this video, if you believe in the information that we provide, I want to encourage you to stop spending your entire day looking for grants. I'm not telling you don't do it at all. Maybe you want to outsource it and have your board members spend some time looking for grants so you can spend time finding ways to raise money for your organization that is much more effective.
Are you or are you pro are you listening to the data that I provide? 49% of the nonprofit revenue comes from program services fees. 32% comes from government contracts and reimbursements. 13% comes from individual donations and gifts. And 85% of those donations come from regular people. Right. Um 5% less than 5% comes from foundation and corporate grants. And then what's growing rapidly is sponsorships and business partnerships. So coming into the nonprofit space, I really need you to know this. Grants are not the highest form of funding. Do you hear me? Grants are not the highest form of funding.
Do you know what the most sold product in the world is? The most sold product in the world, and Google this is the lottery ticket. Do you know why? is because everyone loves the idea of getting something for nothing. Everyone loves the idea on hitting big and not doing that much effort for it. This is why a lot of people come into the nonprofit space and they only want to get a grant. This is why grant writers are making a lot of money. This is why people who are um saying they can find you grants but don't actually find you grants. This is why they're making a lot of money is because just to be honest, a lot of people come into the game and they're too lazy to gain some information and knowledge on how to do it correctly. They hear free money. Free grant. Ooh, grant. I can get free money to start my business. That sounds great. Let me do it. Now, although that is a great thing and grants are a huge benefit to nonprofits, if you come into this industry only trying to acquire grants, I believe you're going to fail.
So then you may say, "Well, Tim, if grants aren't the most accessible way to funding for new nonprofits, well, what do you suggest that we do?" I want you to write this down. Raising funds is the highest form of selling. Raising funds is the highest form of selling. Now, I it's important to me to say this is because I know that people come into this space and they don't like the idea of selling. They don't want to sell. They don't want to be salesy. They don't want to be pitchy. And you don't have to be salesy or pitchy in order for you to have success. But the number one skill set, Google this, where do you work at? Wherever you work at, more than likely the highest income earning position are the sales reps. People who sell. Selling is the highest skill in the world. You sold your wife on marrying you before you married her. You sold your husband on marrying you before he married you. Right? You're selling your kids on listening to your opinion instead of listening to the world's opinion. Again, how we view what we do determines how we do what we do. I want to encourage you to work on research how to become a master salesman. Why is that? Is because fundraising is the highest form of sales. In most cases, when you're raising funds, when you're trying to raise funds, the idea is still in the ideation phase. So, there's not an actual physical product. There's not an actual physical land. So someone is going to donate or contribute to the idea. So if we're contributing to the idea, this means that you, me, we have to be very good at articulating our idea. Are you with me? We have to be very good at articulating the power of our organization, the vision of our organization.
Listen to me. The very first nonprofit that was created in America was called Harvard College, 1636. Harvard Harvard University today. That was actually the very first nonprofit. Let me read this to you. And as I read this, I really want you to hear the perspective and also the vision behind why they thought this should be created. I want you to remember that why they thought this should be created. All right. Harvard was created to educate clergy and produce literate leaders for growing the colonies in New England. Why was it created? The Massachusetts Bay Colonies leadership believed. They believe that an educated ministry was essential to the survival in the spiritual direction of our society. They believed they believed that the educated ministry was essential to the survival and the spiritual direction of our society. They created this organization because they really thought it could be a huge help to the world and they communicated it in that way. Is it Is this making sense? I I really hope that it is.
How was it funded? Harvard was funded entirely through donations. In 1638, it received its first large gift in books and funds from John Harvard, which the school was named after. This traditional charitable giving for public benefit made Harvard the prototype the prototype on how nonprofits operate today. And I need to share this with you because I know that every thought leads to a new thought. Every idea leads to a new idea. Every form of information leads to a new form of information. This organization again was created to educate clergy and other leaders for New England colonies. They wanted to preserve literacy so individuals could read the Bible. And they wanted to advance public good through knowledge and moral leadership. While Harvard has evolved into a massive institution in which we all know today, its foundation as a charitable donation-funded educational institution established many of the early American norms for philanthropic giving, religious and educational missions, as well as the idea of public benefit institutions not operated for private profit. So, whatever nonprofit you plan on creating today, this was the origin. I want to encourage you to rewind this video 30 seconds, a minute or two minutes, however far you need to go back, just so you can hear this again and really let this sit in your spirit so you get it.
So, I'm from Texas and every year me and my family, we love going to the state fair, right? Just in this past year, I remember I was researching the address to the state fair. I went to the website for some crazy reason. I don't know how I got to the website, but on the website, I scrolled to the bottom and it said something crazy. It said that the State Fair of Texas is a 501c3 nonprofit organization. What? A nonprofit? I don't get it. I The ticket cost $20 to get in. For my daughter's ticket, the tickets is $12 to get in. A turkey leg. A turkey leg is 22 tickets. Each ticket is $1. How? How? This place is very expensive, right? How are they a nonprofit? I was so confused. So, I did a little research. The mission of this organization is to celebrate all things Texan by promoting agriculture, education, and community involvement through annual fair and year-round initiatives. Why is this a nonprofit? Even though it brings in millions of dollars annually, by the way, in 2024, they generated over $450 million. Stop listening to your friend, your cousin, the pastor. He told you that nonprofit can't generate revenue. He lied. This is a clear I'm giving you a clear distinction of the truth right here.
So even though we're generating millions of dollars annually, the key difference lies in where the money goes. All the revenue is reinvested into the fair's mission. Even if they have 450 employees and we need to pay these employees to further produce the organization's mission, we can do that. Even if it means we have to pay the executives, we can do that. But what we can't do, what we can't do is pocket the funds. The money can't go from just the business account into your personal account and you go buy a Ferrari even though they generated 400 million. What has to happen is you as the executive or you as the board member or you as an employee of the organization, you're going to be paid based on the work that you're contributing to the organization through salary or through 1099 as an independent contractor. The State Fair of Texas has no owners or shareholders profiting from it. It supports educational, cultural, and community programs in Texas.
Now, what the State Fair does as a nonprofit, they host the annual state fair, which draws a huge amount of revenue from tickets, rides, foods, and sponsorships. They fund scholarships. Over $18 million was awarded to Texas students since the early 1990s. They support agriculture and livestock education. So, anytime you go to the fair, they're always promoting the livestock education, training people on cows, horses. They have horse rides, all things Texans, right? They also heavily invest in the South Dallas and Fair Park communities through workforce development, neighborhood grants, and local business support. And then lastly, which is a key ingredients to how they can actually be a nonprofit, is they preserve Texas heritage and culture, funding exhibits, music, food, and history programs. Now, if you go back and read the mission, the mission statement says to celebrate all things Texans by promoting agriculture, education, and community involvement through an annual fair in year-round initiatives. If you think about this mission statement, think about all the things that I just shared with you. This is how they legally, ethically, morally generate $400 plus million dollars as a nonprofit. Nonprofit does not mean no money. Nonprofit does not mean no money generated. Nonprofit just means that you can't pocket the profits. Hopefully, this video is making sense so far.
So, just to give you a little bit of an encouraging data, in 2023, Americans gave $499 billion to charitable causes. So, it's not that people aren't willing to give to your organization. You just have to market yourself to be found. Over 85% of donations came from individuals, not companies and foundations. The average nonprofit founder who's built a million-dollar nonprofit started with less than $5,000, but they built their organization through passion, community, and strategy. And more than 70% of donors give to organizations with clear and emotionally compelling missions and good marketing. So, getting ready to start a nonprofit, I can guarantee you that if you don't already have a network, if you don't already have a group of people that know you and know your intent, and it's only strangers that are working with you, don't anticipate receiving massive amounts of donations yet. Because what you're going to have to do the same way as any other business does is you have to market and promote your services. You have to market and promote your cause, market and promote your mission, market and promote your storytelling.
You know what I realized about the nonprofit space is that everybody wants to live an outstanding life, but not everybody wants to stand out in their life. And this is going to be the key ingredient to you being successful. Imagine you want to live an outstanding life, but you don't want to stand out. Imagine you want to live an outstanding life, but you don't want to tell anybody about your organization. This does not work. So, look, I get it. You say that you want to be behind the scenes. You're a person that not really good on camera. you're someone that is an introvert. Hey, me too. I didn't feel like I was good on camera only because I hadn't gotten on camera only because I hadn't started receiving some of the validation and how people felt about my videos. And then it gave me a lot of confidence to get better. And I just want you to know that your life can get better as you get better. Results come from you then to you. Results come from you then to you. So if you have a problem with what you're getting, you have to question what you're giving. So you want a lot of people to give to your organization. I want you to question in your spirit. What is it that I'm giving the information? Is it valuable? Is it useful? Is it genuinely needed? Or do I want people to need it? This is something that you have to be real with yourself about. Once you create this awareness, it's going to be very simple for you to grow your organization.
Now, running your nonprofit, you're going to need at least three board members, and they could be, including yourself. These board members can be family. If they are, that's completely fine. These board members in most states can be under the age of 18. So, you can almost have anyone be on your board. It doesn't matter who it is. The only thing is as you start to grow, you want to make sure that you have skill sets that are valuable to the growth of your organization. So just because Tim is your friend doesn't mean Tim should be on your board if Tim doesn't have the skill sets that are needed to grow the organization. Running this business, I want you to know that you will not be able to do it alone. You're going to need your board. You're going to need volunteers. You're going to need people who are willing to support. And the way to do this is to market and promote your organization. You have to be good and get good. If you're not good right now, it's completely okay. But you have to decide that you're going to get good at learning how to communicate your mission. Can you write that down for me? You have to decide that you're going to get good at learning how to communicate your message to your audience. This is how you will succeed as a nonprofit organization.
So look guys, as we wrap up here, nonprofit does not mean no profit. It does not mean no money generated. I gave you clear data on how many different organizations are raising large amounts of money as a nonprofit organization. Over 12 million people today are employed by nonprofits. So, you can definitely start a nonprofit and raise capital without only applying for grants. I know that you're going to apply for grants and you should apply for grants, but what I would encourage you not to do is spend all of your time applying for grants. actually create a service that people need, actually create programs that people need, partner with different businesses, partner with different foundations. You have to go put yourself out there and talk to people about sponsoring your organization. The best way to build connection is toeto-toe. I want you to remember me telling you that the best way to build connection is toeto toe. sitting at a desk in front of somebody explaining who you are, what you are, how you are, why you are, how you are, why your business is, how it is. Remember that people support people more than they support businesses. So, people need to know you if you want them to know your organization. Remember me saying that. I believe in you. I respect you. I admire you for being on this journey.
If you're looking for more in-depth of exactly how to start a nonprofit organization, I'm going to encourage you to go watch my video that I created on how to start a nonprofit organization in 2024 or in 2025. It's probably the most in-depth video that you've seen on actually how to start. Hopefully, this video has been informative for you and you now have a better understanding of what a nonprofit actually is. Gave you some history about a nonprofit. And again, I know that every thought leads to a new thought. So, with that being said, again, my name is Timothy Wright, the founder and CEO of the nonprofit launcher. I'm signing off. We'll see you again soon. Peace.