Why We’re Misunderstanding the 501c Status

Written by Cecilia Sepp on January 30, 2017

Calvin Coolidge, 30th President of the United States, famously said, “The business of America is business.” I like to paraphrase this quote to “the business of associations is business” because that is in fact what we are.

Non-profit or not-for-profit corporations are indeed corporations; all the 501c statuses are incorporation statuses and thus, businesses. This is why a 501c corporation must incorporate via Articles of Incorporation.

However, there is a definite distinction in that a 501c corporation is not required to pay federal income tax on any income related to the fulfillment of their mission (although filing requirements exist to report income, expenses, and other information as necessary on the 990 form). [Note: Unrelated business income tax (UBIT) is another issue and does require payment of taxes as outlined in the law.]

Despite the fact associations are indeed corporations, there is still a tenacious belief that associations are a dramatically different species of organization from other businesses. I recently heard a board member state, “After all, it’s not like we are running a business. We are running an association.” This is a reflection of many misconceptions about the variety of 501c corporations since many people confuse “charity” with “association.”

For example, many people are of the opinion that a “non-profit” and a “not for profit” are two very different organization types. While I have heard strong arguments stating that these are different, I think that we should just use clearer language that provides specificity rather than argue a difference in wording that in the end is no real difference. As noted in the last paragraph, let’s be clearer about a charity v. an association – just like we are clear about a trade association v. a professional society v. a foundation. Different words for different types of non-profits that explain a bit more clearly what each one is.

However, no matter what type of 501c organization you may work with or for, the fact is, crucial business principles apply in our business specialty just as much as they do in other types of businesses.

While both for-profit and non-profit businesses have boards of directors, one area that differs dramatically from our for-profit brethren is that many people we work with are volunteering their time rather than being paid or receiving stock options or dividends. The different roles and requirements for a non-profit board are what make it stand apart from other boards, which is why you can find so much literature on working with and training your board (and why this will likely remain a booming revenue stream for consultants).

The drivers and motivators for a non-profit board member are different because there is no direct compensation for their time. Many are there because they want to be there and want to help their profession or industry succeed. (You do find what you may call “resume builders” but the majority of people who join an association board are interested in opportunities to participate and have new experiences.)

For this reason, you want your board members to get something from the experience. Besides the good feeling a board member may get from serving (and the cool title!) there are ways to create an experience that helps them grow professionally and personally while serving the organization.

Relating this back to business, it is an excellent opportunity for board members to exercise their business experience in a different way. This creates a valuable situation for learning by seeing things from a different perspective.

For a board member with less experience, it is an opportunity for them work on skills they may not have or want to improve.. For example, a basic understanding of finance is necessary, as they have to read through and understand the association’s financial statements in order to effectively make decisions. For some this is a skill that has already been acquired, but it won’t be the case for all. What can you do to help your board members receive the necessary training? This is a valuable skill that will be of use to them far beyond their roles on your board.

Helping your board maintain a strategic focus rather than an operational one is another beneficial experience for their personal growth and is a service to the organization. A board experience should lift them out of their daily “to do” mindset and responsibilities and give them a chance for professional development.

Guiding the board members to apply their business acumen to the non-profit business model can improve performance of the organization while providing an enriching experience.

Despite this desire to provide a great volunteer experience, we must communicate strongly and clearly that the association – or charity or foundation – is a business. Thus, business principles apply. What differs is the mission and the outcomes but we must always remember that the business side must be strong because with no margin, there is no mission.