Challenges in the Distinction and Reporting of Business Activities of Non-Profit Legal Entities

Abstract

Non-profit legal entities (NPOs) are progressively engaging in business activities to support their missions, which raises complex challenges in accounting, taxation, and regulatory compliance. This study examines the difficulties in distinguishing and reporting business activities within NPOs. The research is limited to 12 Bulgarian NPOs over the period 2021–2023, focusing on entities that combine non-profit and business operations. A mixed-methods approach was applied, including normative analysis, literature review, and empirical examination of financial reports, using indicators such as the Relative Share of Net Sales Revenue (RSNSR), Return on Equity (ROE), and Net Profit Margin (NPM) of subsidiaries. The study reveals variability in how NPOs structure and report their business activities, depending on whether they are carried out internally or through subsidiary entities. Subsidiary models offer greater clarity in financial reporting and risk separation, although not always improved efficiency. The findings emphasize the need for legal amendments, improved internal policies, and sector-wide methodological guidance to enhance reporting and ensure alignment between business activities and the public benefit mission. The study provides a comprehensive and context-specific analysis of business activities within NPOs—an area largely underexplored in the Bulgarian nonprofit sector. It may support strategic decisions by directors, donors, and clients.