Unlike privately owned small businesses, nonprofits of all sizes must file yearly Form 990 reports with the Internal Revenue Service detailing where their money comes from and how it is spent, said Kate Barr, the executive director of the Nonprofits Assistance Fund in Minneapolis. Reports are available to the public for at least three years.

Minnesota nonprofits also report annually to the offices of the Minnesota Secretary of State and Attorney General. The Charities Review Council in St. Paul conducts voluntary reviews of several charities each year and judges whether they meet the group’s standards for public disclosure, financial stability, efficiency and fundraising.

“They either meet every standard or they don’t get our rating,” said MartinWera, nonprofit services manager for the Charities Review Council. “Almost 90 percent of all the nonprofits we review meet all the standards.”

Nonprofits with an IRS 501(c)(3) designation are generally exempt from paying federal and state income taxes, property taxes and sales taxes, but that doesn’t mean they don’t contribute to economic growth.

Charitable organizations pay payroll taxes on their employees, who in turn pay income taxes and spend their earnings in the community. In fact, one in 10 workers inMinnesota is employed by a nonprofit, and state nonprofits pay $12.6 billion in wages annually.

By serving as a conduit for funds from public programs and private foundations, nonprofits also help to improve communities and strengthen businesses. Many exist specifically to help communities increase economic development, employment and vitality. IQ

Contrary to public perception, nonprofit organizations are able to earn a profit, as long as it is reinvested in the work of the organization. They often have an internal structure that closely resembles corporations, and they must follow the same employment laws and human resources policies, according to Christine Durand, spokeswoman for the Minnesota Council of Nonprofits.

In addition, if a Minnesota nonprofit receives more than $750,000 in annual revenues, it must hire an independent auditor. But unlike for-profit businesses, who must please their clients to keep their doors open, nonprofits serve two masters—the people and agencies that fund them and the clientele who need their services.

When a business’s revenue falls, it can cut back on services. A nonprofit, on the other hand, is likely to see revenue decrease at precisely the moment when demand for its services is at its highest.

“Nonprofits have to do all the same things a business does to stay financially secure, but they have to do it within an economic model that says that when demand for your services is high, you can’t raise prices,” Barr said. “It’s like what people said about Ginger Rogers. She could do everything Fred Astaire could do, but backwards and wearing high heels.”

In tough economic times, charitable donors want to know that the dollars they give are spent wisely. That’s why myths about how nonprofits operate can be so damaging. The truth is that nonprofits already operate under restrictions and requirements that might feel rigorous to many business leaders.