Do nonprofits have an edge over businesses in the same markets because
of their tax-exempt status?

---

Request for Question Clarification by pafalafa-ga on 20 Sep 2005 07:06 PDT

firemom-ga,

Interesting question.

Nonprofits do have a huge and obvious advantage in the US in that they
don't pay tax.

At the same time, non-profits are constrained by the nature of their
mission.  There are constraints built into the tax-code to prevent
non-profits from encroaching too heavily into the for-profit area.  I
believe the last major changes in this respect took place in the
1950's, when non-profits lost tax-emempt status for any businesses
they were running that were not directly related to their mission,
even if the profits were turned over to the mission.  In this way, the
non-profits were constrained from direct competition with for-profits.

Still, there are a number of sectors where the two can be said to
directly compete -- non-profit vs for-profit sporting events, museums,
health care facilities to name the major ones that come to mind.

However, I haven't heard the NBA complaining about competition from
the NCAA...so maybe it all works out in the end.

Let us know a bit more about your interest in this, and perhaps we can
provide a more focused reply.

pafalafa-ga

Dear Firemom-ga,

There are four areas where non-profits have a distinct edge over businesses:

1) Free publicity. All radio and television stations broadcasting
over the public airwaves get the right to use those airwaves in 
exchange for running PSAs - Public Service Announcements. 

So any legitimate non-profit that provides the radio stations with recorded
commercials, or television stations with video commercials, can get free
air-time worth a small fortune - if they are persistent. 

2) Non-profits can raise operating capital much more easily, in the
form of contributions, by approaching individuals, corporations and 
government agencies. And none of that money ever needs to be paid back,
unlike for-profit businesses.

3) Non-profits can arrange joint events with other businesses, like
corporations, radio and TV stations very easily. For businesses to do
the same thing, their partners want more of a share of the expenses 
picked up by their business partners. Non-profits rarely need to offer
to pick up any of the tabs. 

4) And when was the last time you heard of a business going to
a printer and having the printer do all the work for free? Non-profits
can get lots of free services, even free rental space, where businesses
cannot. So, they have the advantage of much lower operating costs.

And of course, the volunteers. Managed properly and with proper 
enthusiasm, a non-profit can attract the free skills of a great many
volunteers. Businesses generally have to pay people to work for them.
(Yes, sometimes, they can get interns to work for free.)

These are the primary advantages...other than the fact that they don't have
to pay taxes.

There is one disadvantage. The more successful and visible the non-profit gets,
the more likely it is to be audited by IRS and any number of other agencies
related to that entity's industry. 

I hope that helps.

Best wishes,

Your TaxMama-ga

Very good response.  Thank you for your help.

Are you thinking of any specific nonprofit agencies?
By definition, they shouldn't be in competition with commercial
enterprises, but maybe you have examples that seem to contradict this.

I am referring to nonprofits in general.  Because they do not have the
same tax implications, plus they receive government grants does this
provide them edge?

Firemom,
Perhaps the Wikipedia description of non-profit organizations will
help you understand their activities and the constraints on commercial
activities.

http://en.wikipedia.org/wiki/Non-profit

Regards, Myoarin