Nonprofit organizations receive two basic types of income: restricted income and unrestricted income. These two types should be recorded separately and properly filed to avoid legal problems in the future, and if you are considering starting a nonprofit organization, it is imperative that you understand the difference between restricted and unrestricted income.
Nonprofit Organizations: Restricted Income
Restricted income is money that flows into your nonprofit organization for a specific purpose, usually one which is specified by the donor. Every year, individuals and organizations give millions of dollars to nonprofit organizations, and often this money is in the form of restricted income.
Let’s say, for example, that you run a nonprofit organization that provides fundraising for cancer research. Maybe you have a specific alliance for a particular type of cancer – such as leukemia – or perhaps you raise money for cancer research in general. Regardless, let’s say that someone calls your organization and wants to donate $15,000 for research into chronic lymphocytic leukemia, and your nonprofit organization accepts that type of donation.
When you receive a donation or a monetary gift for a specific cause, that money must be set aside for that particular purpose. You cannot, after having accepted the donation, use the money for administrative costs. You also cannot give the money to scientists researching myelogenous leukemia. If you accept donations for a specific purpose, then those donations are restricted income and can only be used for the purpose specified by the donor.
Nonprofit Organizations: Unrestricted Income
Unrestricted income, on the other hand, is money that is donated to your organization for no specific purpose other than to support the organization. For example, let’s say that XYC Tech Corp. sends your nonprofit organization $5,000 each month. There is no designation for how those funds must be spent, which means that it is unrestricted.
Unrestricted income does not have to be tracked as carefully as restricted income because it can be used for an legitimate purpose for your organization. You can use unrestricted income for administrative costs, expansions, employee salaries, research or any number of other costs your organization might incur.
For a nonprofit organization to flourish, you must be meticulous with your records and bookkeeping. Make sure that restricted income is funneled through different channels than unrestricted income, and that you can prove where restricted income funds wind up should your practices ever come into question. This is where a paper trail becomes essential; always know where every dime that you accept goes, and how it is used.