A non-profit organization (NPO), also known as a non-business entity or non-profit institution, is dedicated to furthering a particular social cause or advocating for a shared point of view. In economic terms, it is an organization that uses its surplus of the revenues to further achieve its ultimate objective, rather than distributing its income to the organization's shareholders, leaders, or members. Non-profits are tax exempt or charitable, meaning they do not pay income tax on the money that they receive for their organization. They can operate in religious, scientific, research, or educational settings.
The key aspects of nonprofits is accountability, trustworthiness, honesty, and openness to every person who has invested time, money, and faith into the organization. Nonprofit organizations are accountable to the donors, funders, volunteers, program recipients, and the public community. Public confidence is a factor in the amount of money that a nonprofit organization is able to raise. The more nonprofits focus on their mission, the more public confidence they will have, and as a result, more money for the organization. The activities a nonprofit is partaking in can help build the public’s confidence in nonprofits, as well as how ethical the standards and practices are.
Statistics in the United States
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According to the National Center for Charitable Statistics (NCCS), there are more than 1.5 million non-profit organizations registered in the United States, including public charities, private foundations, and other non-profit organizations. Contributions to different charities reached $358.38 billion in 2014, which was an increase of 7.1% from the 2013 estimates. Out of these contributions, Religious organizations received 32%, educational institutions received 15%, and human service organizations received 12%. Between September 2010 and September 2014, approximately 25.3% of Americans over the age of 16 volunteered for a non-profit
Mechanism of money raising
Non-profits are not driven by generating profit, but they must produce enough income to pursue their social duties. Non-profits are able to raise money in different ways. This includes income from donations from individual donors or foundations, sponsorships from corporations, income from government funding, income from programs, services or merchandise sales, and income from investments. Each NPO is unique in which source of income works best for them. With an increase in NPO’s within the last decade, organizations have adopted competitive advantages to create revenue for themselves to remain financially stable. Donations from private individuals or organizations can change each year and government grants have diminished. With changes in funding from year to year, many nonprofit organizations have been moving toward increasing the diversity of their funding sources. For example, many nonprofits that have relied on government grants have started fundraising efforts to appeal to individual donors.
Challenges
NPO's challenges primarily stem from lack of funding. Funding can either come from within the organization, fundraising, donations, or from the federal government. When cutbacks are made from the federal government, the organization suffers from devolution. This term describes when there is a shift of responsibility from a central government to a local, subnational authority. The shift is due to the loss of funds; therefore, resulting in changes of responsibilities in running programs. Because of this frequent challenge, management must be innovative and effective in the pursuit of success.
Nonprofit vs. not-for-profit
Nonprofit and not-for-profit are terms that are used similarly, but do not mean the same thing. Both are organizations that do not make a profit, but may receive an income to sustain their missions. The income that nonprofit and not-for-profit organizations generate is used differently. Nonprofit organizations return their income back to the organization if they generate extra income. Not-for-profits use their excess money to pay their members who do work for them. Another difference between nonprofit organizations and not-for-profit organizations is their membership. Nonprofits have volunteers or employees who do not receive any money from the organizations fundraising efforts. They may earn a salary for their work that is independent from the money the organization has fundraised. Not-for-profit members have the opportunity to benefit from the organizations fundraising efforts. Both nonprofits and not-for-profits are tax exempt under the IRS publication 557. Although they are both tax exempt, each organization faces different tax code requirements. A nonprofit is tax exempt under 501(c)(3) requirements if it is either a religious, charitable, or educational based organization. Not-for-profits are tax exempt under 501(c)(7) requirements if they are an organization for pleasure, recreation or another non-profit purpose.
Non-profits are either member-serving or community-serving. Member-serving nonprofit organizations create a benefit for the members of their organization and can include but are not limited to credit unions, sports clubs, and advocacy groups. Community-serving nonprofit organizations focus on providing services to the community either globally or locally. Community-serving nonprofits include organizations that deliver aid and development programs, medical research, education, and health services. It is possible for a nonprofit to be both member-serving and community-serving.
Management
A common assumption of non-profits is that they are run completely by volunteers. This is not the case. Most non-profits have staff that work for the company, with many then bringing in volunteers to do the work led by the staff. The money to pay staff comes from the state law that allows nonprofits to pay reasonable salaries to their employees. NPO’s must be careful that their staff are not making too much money. If that is the case, the IRS has the right to penalize the non-profit.
The extent to which a nonprofit organization is considered business-like, for example in how they manage their resources and accomplish their missions, is something nonprofits have to balance. Although the goal of non-profits isn’t to make a profit, they still have to operate as a business. Nonprofits have the responsibility of focusing on being professional, financially responsible, replace self-interest and profit motive with mission motive, and have the ability to speak both languages of the nonprofit, which is the business language and the nonprofit language. The business language provides the ability to work with money, such as applying for grants, which is crucial for non profits, while the nonprofit language provides the ability to speak to the community. Nonprofits need to balance these both out to have a successful organization.
Functions
NPOs have a wide diversity of structures and purposes. For legal classification, there are, nevertheless, some elements of importance:
- Management provisions
- Accountability and auditing provisions
- Provisory for the amendment of the statutes or articles of incorporation
- Provisions for the dissolution of the entity
- Tax statuses of corporate and private donors
- Tax status of the founders.
Some of the above must be (in most jurisdictions in the USA at least) expressed in the organization's charter of establishment or constitution. Others may be provided by the supervising authority at each particular jurisdiction.
While affiliations will not affect a legal status, they may be taken into consideration by legal proceedings as an indication of purpose. Most countries have laws that regulate the establishment and management of NPOs and that require compliance with corporate governance regimes. Most larger organizations are required to publish their financial reports detailing their income and expenditure publicly.
In many aspects, they are similar to corporate business entities though there are often significant differences. Both not-for-profit and for-profit corporate entities must have board members, steering-committee members, or trustees who owe the organization a fiduciary duty of loyalty and trust. A notable exception to this involves churches, which are often not required to disclose finances to anyone, including church members.
Formation and structure
In the United States, nonprofit organizations are formed by filing bylaws or articles of incorporation or both in the state in which they expect to operate. The act of incorporation creates a legal entity enabling the organization to be treated as a distinct body (corporation) by law and to enter into business dealings, form contracts, and own property as individuals or for-profit corporations can.
Nonprofits can have members, but many do not. The nonprofit may also be a trust or association of members. The organization may be controlled by its members who elect the board of directors, board of governors or board of trustees. A nonprofit may have a delegate structure to allow for the representation of groups or corporations as members. Alternatively, it may be a non-membership organization and the board of directors may elect its own successors.
The two major types of nonprofit organization are membership and board-only. A membership organization elects the board and has regular meetings and the power to amend the bylaws. A board-only organization typically has a self-selected board and a membership whose powers are limited to those delegated to it by the board. A board-only organization's bylaws may even state that the organization does not have any membership, although the organization's literature may refer to its donors or service recipients as 'members'; examples of such organizations are FairVote and the National Organization for the Reform of Marijuana Laws. The Model Nonprofit Corporation Act imposes many complexities and requirements on membership decision-making. Accordingly, many organizations, such as the Wikimedia Foundation, have formed board-only structures. The National Association of Parliamentarians has generated concerns about the implications of this trend for the future of openness, accountability, and understanding of public concerns in nonprofit organizations. Specifically, they note that nonprofit organizations, unlike business corporations, are not subject to market discipline for products and shareholder discipline of their capital; therefore, without membership control of major decisions such as the election of the board, there are few inherent safeguards against abuse. A rebuttal to this might be that as nonprofit organizations grow and seek larger donations, the degree of scrutiny increases, including expectations of audited financial statements. A further rebuttal might be that NPOs are constrained, by their choice of legal structure, from financial benefit as far as distribution of profit to members and directors is concerned.
Tax exemption
In many countries, nonprofits may apply for tax exempt status, so that the organization itself may be exempt from income tax and other taxes. In the United States, to be exempt from federal income taxes, the organization must meet the requirements set forth in the Internal Revenue Code. Granting nonprofit status is done by the state, while applying for tax-exempt designation (such as 501(c)(3), the charitable tax-exemption) is granted by the federal government in the form of the IRS. ... This means that not all nonprofits are eligible to be tax-exempt. NPOs use the model of a double bottom line in that furthering their cause is more important than making a profit, though both are needed to ensure the organization's sustainability.
By jurisdiction
Australia
In Australia, nonprofit organizations include trade unions, charitable entities, co-operatives, universities and hospitals, mutual societies, grass-root and support groups, political parties, religious groups, incorporated associations, not-for-profit companies, trusts and more. Furthermore, they operate across a multitude of domains and industries, from health, employment, disability and other human services to local sporting clubs, credit unions, and research institutes. A nonprofit organization in Australia can choose from a number of legal forms depending on the needs and activities of the organization: co-operative, company limited by guarantee, unincorporated association, incorporated association (by the Associations Incorporation Act 1985) or incorporated association or council (by the Commonwealth Aboriginal Councils and Associations Act 1976). From an academic perspective, social enterprise is, for the most part, considered a sub-set of the nonprofit sector as typically they too are concerned with a purpose relating to a public good. However, these are not bound to adhere to a nonprofit legal structure, and many incorporate and operate as for-profit entities.
In Australia, nonprofit organizations are primarily established in one of three ways: companies limited by guarantee, trusts, and incorporated associations. However, the incorporated association form is typically used by organizations intending to operate only within one Australian state jurisdiction. Nonprofit organizations seeking to establish a presence across Australia typically consider incorporating as a company or as a trust.
Belgium
By Belgian law, there are several kinds of nonprofit organization:
- Vereniging zonder winstoogmerk (Dutch, abbreviated vzw), Vereinigung ohne Gewinnerzielungsabsicht (German) or Association sans but lucratif (French, abbreviated asbl).
- Internationale vereniging zonder winstoogmerk (Dutch, often abbreviated ivzw) or Association internationale sans but lucratif (French, often abbreviated aisbl) for international nonprofit organizations.
- Stichting van openbaar nut (Dutch, abbreviated son) or Fondation d’utilités publique (French, abbreviated fup).
These three kinds of nonprofit organization are in contrast to a fourth:
- Feitelijke vereniging (Dutch) or Association de fait (French), an informal organization, often started for a short-term project, or managed alongside another NPO that does not have any status in law so cannot purchase property etc.(association sans personnalité morale).
Canada
Canada allows nonprofit organizations to be incorporated or unincorporated. They may incorporate either federally, under Part II of the Canada Business Corporations Act, or under provincial legislation. Many of the governing Acts for Canadian nonprofits date to the early 1900s, meaning that nonprofit legislation has not kept pace with legislation that governs for-profit corporations, particularly with regards to corporate governance. Federal, and in some provinces (including Ontario), incorporation is by way of Letters Patent, and any change to the Letters Patent (even a simple name change) requires formal approval by the appropriate government, as do bylaw changes. Other provinces (including Alberta) permit incorporation as of right, by the filing of Articles of Incorporation or Articles of Association.
During 2009, the federal government enacted new legislation repealing the Canada Corporations Act, Part II â€" the Canada Not-for-Profit Corporations Act. This Act was last amended on 10 October 2011, and the act was current until 4 March 2013. It allows for incorporation as of right, by Articles of Incorporation; does away with the ultra vires doctrine for nonprofits; establishes them as legal persons; and substantially updates the governance provisions for nonprofits. Ontario also overhauled its legislation, adopting the Ontario Not-for-Profit Corporations Act during 2010; the new Act is expected to be in effect as of 1 July 2013.
Canada also permits a variety of charities (including public and private foundations). Charitable status is granted by the Canada Revenue Agency (CRA) upon application by a nonprofit; charities are allowed to issue income tax receipts to donors, must spend a certain percentage of their assets (including cash, investments, and fixed assets) and file annual reports in order to maintain their charitable status. In determining whether an organization can become a charity, CRA applies a common law test to its stated objects and activities. These must be:
- The relief of poverty
- The advancement of education
- The advancement of religion, or
- Certain other purposes that benefit the community in a way the courts have said is charitable
Charities are not permitted to engage in partisan political activity; doing so may result in the revocation of charitable status. However, a charity can carry out a small number of political activities that are non-partisan, help further the charities' purposes, and subordinate to the charity's charitable purposes.
France
In France, nonprofits are called associations. They are based on a law enacted 1 July 1901. As a consequence, the nonprofits are also called association loi 1901.
A nonprofit can be created by two people to accomplish a common goal. The association can have industrial or commercial activities or both, but the members cannot make any profit from the activities. Thereby, worker's unions and political parties can be organized from this law.
In 2008, the National Institute of Statistics and Economic Studies (INSEE) counted more than a million of these associations in the country, and about 16 million people older than 16 are members of a nonprofit in France (a third or the population over 16 years old). The nonprofits employ 1.6 million people, and 8 million are volunteers for them.
This law is also relevant in many former French colonies, particularly in Africa.
Hong Kong
The Hong Kong Company Registry provides a memorandum of procedure for applying to Registrar of Companies for a Licence under Section 21 of the Companies Ordinance (Cap.32) for a limited company for the purpose of promoting commerce, art, science, religion, charity, or any other useful object.
India
In India, non-governmental organizations are the most common type of societal institutions that do not have commercial interests. However, they are not the only category of non-commercial organizations that can gain official recognition. For example, memorial trusts, which honor renowned individuals through social work, may not be considered as NGOs.
They can be registered in four ways:
- Trust
- Society
- Section-25 company (Section 8 as per the new Companies Act, 2013)
- Special licensing
- Schools
- Sports.
Registration can be with either the Registrar of Companies (RoC) or the Registrar of Societies (RoS).
The following laws or Constitutional Articles of the Republic of India are relevant to the NGOs:
- Articles 19(1)(c) and 30 of the Constitution of India
- Income Tax Act, 1961
- Public Trusts Acts of various states
- Societies Registration Act, 1860
- Section 25 of the Indian Companies Act, 1956 (Section 8 as per the new Companies Act, 2013)
- Foreign Contribution (Regulation) Act, 1976.
Republic of Ireland
The Irish Nonprofits Database was created by Irish Nonprofits Knowledge Exchange (INKEx) to act as a repository for regulatory and voluntarily disclosed information about Irish public-benefit nonprofits. The database lists more than 10,000 nonprofit organizations in Ireland.In 2012 INKEx ceased to operate due to lack of funding.
Japan
In Japan, an NPO is any citizen's group that serves the public interest and does not produce a profit for its members. NPOs are given corporate status to assist them in conducting business transactions. As at February 2011, there were 41,600 NPOs in Japan. Two hundred NPOs were given tax-deductible status by the government, which meant that only contributions to those organizations were tax deductible for the contributors.
New Zealand
In New Zealand, nonprofit organizations usually are established as incorporated societies or charitable trusts. An incorporated society requires a membership of at least 15Â people.
Russia
Russian law contains many legal forms of non-commercial organization (NCO), resulting in a complex, often contradictory, and limiting regulatory framework. The primary requirements are that NCOs, whatever their type, do not have the generation of profit as their main objective and do not distribute any such profit among their participants (Article 50(1), Civil Code). Most commonly there are five forms of NCO:
- Public associations â€" A public association is the form most comparable to an 'association' as used in international parlance. A public association is a membership-based organization of individuals who associate on the basis of common interests and goals stipulated in the organization's charter.
- Foundations â€" Foundations are property-based, non-membership organizations created by individuals or legal persons (or both) to pursue social, charitable, cultural, educational, or other public benefit goals.
- Institutions â€" The institution (uchrezhdeniye) is a form that exists in Russia and several other countries of the former Soviet Union. Like foundations, institutions do not have members. Unlike foundations, however, institutions do not acquire property rights in the property conveyed to them (Article 120, Civil Code, and Article 20, NCO Law). Moreover, the founders are liable for any obligations of the institution that it cannot meet on its own.
- Non-commercial partnerships â€" A non-commercial partnership (NP) (Article 8, NCO Law) is a membership organization pursuing activities for the mutual benefit of members. Therefore, assets that have been transferred to an NP as donations can be used for purposes other than those having public benefit.
- Autonomous non-commercial organizations â€" An autonomous non-commercial organization (ANO) (Article 10, NCO Law) is a non-membership organization undertaking services in the field of education, social policy, culture, etc., which in practice often generates income by providing its services for a fee.
South Africa
In South Africa, certain types of charity may issue a tax certificate when requested, which donors can use to apply for a tax deduction. Charities/NGOs may be established as voluntary associations, trusts or nonprofit companies (NPCs). Voluntary associations are established by agreement under the common law, and trusts are registered by the Master of the High Court.
Non-profit companies (NPCs) are registered by the Companies and Intellectual Property Commission. All of these may voluntarily register with The Directorate for Nonprofit Organisations and may apply for tax-exempt status to the South African Revenue Service (SARS).
Ukraine
In Ukraine, nonprofit organizations include non governmental organizations, cooperatives (inc. housing cooperative), charitable organizations, religious organizations, political parties, commodities exchange (it is strange, but in Ukraine commodities exchange can't be organized for profit) and more. Nonprofit organization shall obtain of non-profit status from tax authority. State fiscal service is the main registration authority for non-profit status.
United Kingdom
- In the UK, many nonprofit companies are incorporated as a company limited by guarantee. This means that the company does not have shares or shareholders, but it has the benefits of corporate status. This includes limited liability for its members and being able to enter into contracts and purchase property in its own name. The profits of the company (also referred to as the trading surplus) must be invested in achieving these goals and not distributed to the company's members.
Since the Companies Act 2006, nonprofit companies may be formed as a Community Interest Company (CIC). These are forms of company limited by guarantee or company limited by shares but with special conditions and are intended specifically to ensure that the profits and assets of the company are used for the public good, even when managed for (limited) profit.
A charity is a nonprofit organization that meets stricter criteria regarding its purpose and the method in which it makes decisions and reports its finances. For example, a charity is generally not allowed to pay its trustees. In England and Wales, charities may be registered with the Charity Commission. In Scotland, the Office of the Scottish Charity Regulator serves the same function. Other organizations that are classified as nonprofit organizations elsewhere, such as trade unions, are subject to separate regulations and are not regarded as 'charities' in the technical sense.
United States
- For a United States analysis of this issue, see 501(c) and Charitable organization (United States).
After a nonprofit organization has been formed at the state level, the organization may seek recognition of tax-exempt status with respect to U.S. federal income tax. That is done typically by applying to the Internal Revenue Service (IRS), although statutory exemptions exist for limited types of nonprofit organization. The IRS, after reviewing the application to ensure the organization meets the conditions to be recognized as a tax exempt organization (such as the purpose, limitations on spending, and internal safeguards for a charity), may issue an authorization letter to the nonprofit granting it tax-exempt status for income-tax payment, filing, and deductibility purposes. The exemption does not apply to other federal taxes such as employment taxes. Additionally, a tax-exempt organization must pay federal tax on income that is unrelated to their exempt purpose. Failure to maintain operations in conformity to the laws may result in the loss of tax-exempt status.
Individual states and localities offer nonprofits exemptions from other taxes such as sales tax or property tax. Federal tax-exempt status does not guarantee exemption from state and local taxes and vice versa. These exemptions generally have separate applications, and their requirements may differ from the IRS requirements. Furthermore, even a tax-exempt organization may be required to file annual financial reports (IRS Form 990) at the state and federal levels. A tax-exempt organization's 990 forms are required to be available for public scrutiny.
Governance
The board of directors has ultimate control over the organization, but typically an executive director is hired. In some cases, the board is elected by a membership, but commonly, the board of directors is self-perpetuating. In these 'board-only' organizations, board members nominate new members and vote on their fellow directors' nominations. Part VI, section A, question 7a of the Form 990 asks 'members, stockholders, or other persons who had the power to elect or appoint one or more members of the governing body?'
Accreditation
A nonprofit organization in the United States can receive an accreditation by undergoing a third-party review from the Standards for Excellence Institute to ensure efficient use of resources.
Problems
Founder's syndrome
Founder's syndrome is an issue organizations experience as they expand. Dynamic founders, who have a strong vision of how to operate the project, try to retain control of the organization, even as new employees or volunteers want to expand the project's scope or change policy.
Resource mismanagement
Resource mismanagement is a particular problem with NPOs because the employees are not accountable to anybody who has a direct stake in the organization. For example, an employee may start a new program without disclosing its complete liabilities. The employee may be rewarded for improving the NPO's reputation, making other employees happy, and attracting new donors. Liabilities promised on the full faith and credit of the organization but not recorded anywhere constitute accounting fraud. But even indirect liabilities negatively affect the financial sustainability of the NPO, and the NPO will have financial problems unless strict controls are instated. Some commenters have argued that the receipt of significant funding from large for-profit corporations can ultimately alter the NPO's functions. A frequent measure of an NPO's efficiency is its expense ratio (i.e. expenditures on things other than its programs, divided by its total expenditures).
Competition for talent
Competition for employees with the public and private sector is another problem that nonprofit organizations inevitably face, particularly for management positions. There are reports of major talent shortages in the nonprofit sector today regarding newly graduated workers, and NPOs have for too long relegated hiring to a secondary priority, which could be why they find themselves in the position many do. While many established NPOs are well-funded and comparative to their public sector competitors, many more are independent and must be creative with which incentives they use to attract and maintain vibrant personalities. The initial interest for many is the remuneration package, though many who have been questioned after leaving an NPO have reported that it was stressful work environments and implacable work that drove them away.
Public- and private-sector employment have, for the most part, been able to offer more to their employees than most nonprofit agencies throughout history. Either in the form of higher wages, more comprehensive benefit packages, or less tedious work, the public and private sectors have enjoyed an advantage over NPOs in attracting employees. Traditionally, the NPO has attracted mission-driven individuals who want to assist their chosen cause. Compounding the issue is that some NPOs do not operate in a manner similar to most businesses, or only seasonally. This leads many young and driven employees to forego NPOs in favor of more stable employment. Today, however, nonprofit organizations are adopting methods used by their competitors and finding new means to retain their employees and attract the best of the newly minted workforce.
It has been mentioned that most nonprofits will never be able to match the pay of the private sector and therefore should focus their attention on benefits packages, incentives and implementing pleasurable work environments. A good environment is ranked higher than salary and pressure of work. NPOs are encouraged to pay as much as they are able and offer a low-stress work environment that the employee can associate him or herself positively with. Other incentives that should be implemented are generous vacation allowances or flexible work hours.
Online presence
Many NPOs often use the .org or .us (or the CCTLD of their respective country) or .edu top-level domain (TLD) when selecting a domain name to differentiate themselves from more commercial entities, which typically use the .com space.
In the traditional domain noted in RFC 1591, .org is for 'organizations that didn't fit anywhere else' in the naming system, which implies that it is the proper category for non-commercial organizations if they are not governmental, educational, or one of the other types with a specific TLD. It is not designated specifically for charitable organizations or any specific organizational or tax-law status; however, it encompasses anything that is not classifiable as another category. Currently, no restrictions are enforced on registration of .com or .org, so one can find organizations of all sorts in either of these domains, as well as other top-level domains including newer, more specific ones which may apply to particular sorts of organization including .museum for museums and .coop for cooperatives. Organizations might also register by the appropriate country code top-level domain for their country.
Alternative names
Instead of being defined by 'non' words, some organizations are suggesting new, positive-sounding terminology to describe the sector. The term 'civil society organization' (CSO) has been used by a growing number of organizations, including the Center for the Study of Global Governance. The term 'citizen sector organization' (CSO) has also been advocated to describe the sector â€" as one of citizens, for citizens â€" by organizations including Ashoka: Innovators for the Public. Advocates argue that these terms describe the sector in its own terms, without relying on terminology used for the government or business sectors. However, use of terminology by a nonprofit of self-descriptive language that is not legally compliant risks confusing the public about nonprofit abilities, capabilities, and limitations.
In some Spanish-language jurisdictions, nonprofit organizations are called "civil associations".
See also
References
Further reading
- Snyder, Gary R., Nonprofits: On the Brink : How Nonprofits have lost their way and some essentials to bring them back, 2006.
- P. Hartigan, 2006, 'It's about people, not profits', Business Strategy Review, Winter 2006
External links
- Nonprofit Resources at Curlie (based on DMOZ)
- Nonprofits & Philanthropy Research at IssueLab
- The Benefits of Nonprofit Organizations