Can you keep creating non-profit organizations to receive income?

Absolutely. Universities are non-profit much of the time, and they still are income producing.

The difference is the purpose of the venture. Non-profits are meant to provide a service for “public good” in the most general sense. Compensation received for that is ancillary to that but necessary for it. The regulations, therefore, about how it is managed, what the salary structures are, etc. are different. For profits also provide a service/product whatever, but the purpose is to make a profitable entity – to make more and more money. There needn’t be any other benefit. Therefore, they are taxed under and regulated under different provisions.

Yes you can. Further, you don’t even need to keep creating new ones.

Being non-profit organization simply means that the organization has an overall goal of providing a function other than producing a profit for the organization itself. That does not mean that the people working for the organization do so for free. Most non-profit organizations have several people on the payroll hired to take care of the business of running the organization.

It would not be illegal, unusual, or for that matter immoral (provided the organization does what it is chartered to do) for a couple to start a non-profit and have the organization pay them salaries for the job they do to keep the organization running. For example, one could be on staff as a book keeper and the other as fund raising executive officer. As long as any funds they raise over and above those to cover the origination expenses (employee salaries included) go towards the stated goal the end result is a self sustaining non-profit that is (hopefully) doing some good in the world and everybody wins.

I think it’s also helpful to look at it from the perspective of the fiduciary duties of the management.

Non-profits will raise money from people, but those people will not be investors/creditors of the corporation (at least in the standard sense). Therefore, the corporation’s management will have duties only to those the corporation was meant to serve.

For-profits will raise money through investment-seeking behavior, in addition to the regular business. However, those entities, whether they be shareholders, banks, etc. will expect some return on the investment. Therefore, the management not only has a responsibility to consumers/purchasers, but also to investors and creditors to provide them with that return. Therefore, they must balance those interests in order to fulfill their fiduciary duties, which would prevent them from simply focusing efforts on public good.

If you collect tax-exempt donations and aren’t primarily spending the money on exempt activities, it’s tax fraud. And it’s not uncommon.

Here are some no-nos from the IRS ( PDF ):
Because a substantial portion of an organization’s activities must further its exempt purpose(s), certain other activities are prohibited or restricted including, but not limited to, the following activities. A 501©(3) organization:
—must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office;
—must restrict its lobbying activities to an insubstantial part of its total activities;
—must ensure that its earnings do not inure to the benefit of any private shareholder or individual;
—must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests;
—must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory; and may not have purposes or activities that are illegal or violate fundamental public policy.

—must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests;
And this is the rumor!!

@Aster Right from IRS site for tax fraud “You can call the ( IRS )agency’s fraud hotline at 1–800-829–0433 for instructions. While you must reveal your identity to the IRS, your name will not be made public.”

Oh, you can collect up 15% of collected back taxes up to 10 Million dollars.

@Aster Operating for the benefit of private interests is a rather gray area.

There is a big difference between being paid by a non-profit, even one that you have founded yourself, to perform a service necessary for continued operation of the organization and having the organization itself work for the benefit of the founder or founder’s family.

For example, you can start a non-profit to raise money to feed hungry children and the organization can do any number of fund raising activities and it is perfectly legitimate for the organization to pay the person who organizes the fund raisers, the book keeper, the janitor, the gardener, the window washer, etc… provided they are all being paid for services beneficial to the operation of the organization and, as I understand it, it doesn’t matter whether or not any of those people are members of the family.

However, one cannot start a non profit whose charter (i.e. the stated purpose of the organization) directly benefits the founder or the founder’s family. For example, you can’t start a non-profit to raise money to feed your own kids.

@Aster – I think you’re interpreting “purpose”, which is a function of the organization, more like “reason”, which is a function of the individual. Income drawn from a non-profit may flow to the founder and it’s shareholders, and inevitably there will be some benefit form that will inure to all the parties that the founder is related to in some way shape or form.

I waited to see what @YoBob was writing – and his examples work well. Payment to a founder or shareholder mush be reasonable in light of services actually provided. It is indeed a “gray area,” as numbers can be fudged, but there are many services that one may provide for the foundation of non-profits that would be compensated in any other context, and if a founder is providing those services and the fees are reasonable, it’s income for the service and not due to the status as a founder.

Think also of services that increase value. The purchase and sale of securities is a potential income-raising activity. One who performs this may be provided a fee, even the founder. The purchase and sale, however, must be to produce value to be used by the corporation for its exempt purpose. Therefore, a successful purchase and sale of certain securities which increase the holdings of an exempt organization increase it’s “value” in theory – but the difference between the exempt organization and a non-exempt one is that in a non-exempt, increasing the profits/value of the corporation of which you are the founder or in which you own shares also increases your personal income should you sell those shares. So you would potentially, as an employee, get a service fee and also the cap gains from the sale of the shares in your company.

One can completely make a career from the foundation of non-profits. However, the income is realized as an employee or service provider in relation to the non-profit, and not as income generated from ownership.

I think this article on the ethical considerations regarding funding for-profit institutions shows a good example of the difference between for-profit and non-profit institutions.

Non-profit universities may have trustees, but tuition and other increases that raise money for the university will go to operations, endowment, etc., and the trustees (nominal owners) aren’t going to earn on their investment. Shareholders in for-profit university like Phoenix invest knowing that tuition will be considered income to the corporation that is factored into increased value of shares and dividends for them. The difference is between passive and active earnings. To get income from a non-profit, you need to do something for it (draft the Articles of Organization, for example). To get income from a for-profit, you merely need to own a share – give it some money, basically – and sit back and earn while others operate it.