A
nonprofit organization (abbreviated
NPO, also
not-for-profit) is an
organization that does not distribute
its surplus funds to owners or shareholders, but instead uses them
to help pursue its goals . Examples of NPOs include charities (i.e.
charitable organizations) ,
trade unions, and public
arts organizations. Most governments and government
agencies meet this definition, but in most countries they are
considered a separate type of organization and not counted as
NPOs.
Non-profit distinction
Whereas for-profit
corporations exist
to earn and distribute taxable business earnings to
shareholders, the nonprofit corporation exists
solely to provide programs and services that are of public benefit.
Often these programs and services are not otherwise provided by
local, state, or federal entities. While they are able to earn a
profit, more accurately called a surplus, such earnings must be
retained by the organization for its future provision of programs
and services. Earnings may not benefit individuals or
stake-holders. Nonprofit organizations may put substantial funds
into hiring leadership and management personnel. In the past, many
nonprofits considered this to be unreasonably businesslike and
money-focused, but since the late 1980s there has been a growing
consensus that nonprofits can achieve their missions more
effectively by using some of the same methods developed in
for-profit enterprises. These include effective internal
management, ensuring accountability for results, and monitoring the
performance of different divisions or projects in order to make the
best use of their funds and people. Those require management and
that, in turn, begins with the organization's mission.
Nature and goals
NPOs are often
charities or
service organizations; they may be organized as a not-for-profit
corporation or as a
trust, a
cooperative, or they may be purely
informal.
Sometimes they are also called
foundations, or
endowments that have large
stock funds. A very similar organization called
the
supporting
organization operates like a foundation, but they are more
complicated to administer, they are more tax favored, and the
public charities that receive grants from them must have a
specially determined relationship.
Foundations give out
grants to other
NPOs, or fellowships and direct grants to participants. However,
the name
foundations
may be used by any not-for-profit corporation — even
volunteer organizations or
grass roots groups.
Applying
Germanic or Nordic law (e.g., Germany
, Sweden
, Finland
), NPOs
typically are voluntary
associations, although some have a corporate structure (e.g.
housing cooperatives).
Usually a voluntary association is founded upon the principle of
one-person-one-vote.
Legal aspects
There is a wide diversity of structures and purposes in the NPO
landscape. For legal classification and eventual scrutiny, there
are, nevertheless, some structural elements of prime legal
importance:
- Economic activity
- Supervision and management provisions
- Representation
- Accountability and Auditing provisions
- Provisions for the amendment of the statutes or articles of
incorporation
- Provisions for the dissolution of the entity
- Tax status of corporate and private donors
- Tax status of the foundation
Some of the above must be, in most jurisdictions, expressed in the
document of establishment. 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 in legal proceedings as an indication of
purpose.
Most countries have laws which regulate the establishment and
management of NPOs, and which require compliance with
corporate governance regimes. Most
larger organizations are required to publish their financial
reports detailing their income and expenditure for the public. In
many aspects they are similar to
business entities though there are often
significant differences. Both non-profit and for-profit 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,
though most churches remain fiscally transparent with their
members.
Formation and structure
In the
United
States
, nonprofit organizations are formed by
incorporating in the state in which they expect to do
business. The act of incorporating creates a legal entity
enabling the organization to be treated as a corporation under law
and to enter into business dealings, form contracts, and own
property as any other individual or for-profit corporation may
do.
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. Nonprofits may have a
delegate structure to allow for the representation of groups or
corporations as members. Alternately, it may be a non-membership
organization and the board of directors may elect its own
successors.
A primary
difference between a nonprofit and a for-profit corporation is that
a nonprofit does not issue stock or pay dividends, (for example,
The Code of the Commonwealth of Virginia
includes the Non-Stock Corporation Act that is used
to incorporate nonprofit entities) and may not enrich its directors. However, like for-profit
corporations, nonprofits may still have employees and can
compensate their
directors within
reasonable bounds.
The two major types of nonprofit organization structure are
membership and
board-only. A membership
organization elects the board and has regular meetings and 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 the organization has no membership, although
the organization's literature may refer to its donors as "members";
examples of such structures 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
American
Society of Association Executives and Wikimedia
, have formed board-only structures. The
National
Association of Parliamentarians has raised concerns about the
implications of this trend for the future of openness,
accountability, and understanding of grassroots concerns in
nonprofit organizations. Specifically, they note that nonprofit
organizations, unlike business corporations, are not subject to
market discipline for products and shareholder discipline over
their capital; therefore, without membership control of major
decisions such as 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 level
of scrutiny rises, including expectations of audited financial
statements.
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 by the
Internal Revenue Service.
United States
- For a United States analysis of this issue, see 501 and Charitable
organization#United States.
After a recognized type of legal entity has been formed at the
state level, it is customary for the nonprofit organization to seek
tax exempt status with respect to its
income tax obligations. That
is typically done by applying to the Internal Revenue Service
(IRS), although statutory exemptions exist for limited types of
nonprofit organizations. 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 an
organization losing its 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. These
exemptions generally have separate application processes 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 level.
Canada
In
Canada
, NPOs may be formed at either the federal or
provincial levels. Charities must generally be registered
with the
Canada Revenue Agency
and may issue tax receipts for donations.
India
In
India
, NPOs are commonly known as Non-Governmental
Organizations (NGOs).
They can be registered in four ways, viz.1. Trust2. Society3.
Section-25 Company4. Special Licensing.
Registration can be done with the Registrar of
Companies(RoC).
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
- Foreign Contribution (Regulation) Act, 1976
South Africa
In
South Africa, charities issue a tax
certificate when requested by donors which can be used as a tax
deduction by the donor .
United Kingdom
In the UK, many non-profit companies are incorporated as a
company limited by guarantee.
This means that the company doesn't 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 goals
("objects") of the company are defined in the
Memorandum of Association when the
company is formed. 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.
Alternatively, non-profit companies may be formed as a
Community Interest Company. This
is in many ways similar to a
Limited Liability Company, but is
intended specifically to ensure that the profits and assets of the
company are used for public good.
A
charity is
a non-profit organisation that meets stricter criteria regarding
its purpose and the way 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 which are classified as non-profit
organizations elsewhere, such as trade unions, are subject to
separate regulations, and are not regarded as "charities" in the
technical sense.
Issues faced by NPOs
Capacity building is an ongoing
problem faced by NPOs for a number of reasons. Most rely on
external funding (government funds, grants from
charitable foundations, direct
donations) to maintain their operations and changes in these
sources of revenue may influence the reliability or predictability
with which the organization can hire and retain staff, sustain
facilities, or create programs. In addition, unreliable funding,
long hours and low pay can lead to employee
burnout and high rates of
turnover.
Founder's syndrome is an issue
organizations face as they grow. Dynamic founders with a strong
vision of how to operate the project try to retain control over the
organization, even as new employees or volunteers want to expand
the project's scope and try new things.
Examples
In the
United
States, two of the wealthiest non-profit organizations are
the Bill and Melinda
Gates Foundation, which has an endowment of $38 billion, and
the Howard Hughes
Medical Institute, which has an endowment of approximately
$14.8 billion. Outside the United States, another large NPO
is the British
Wellcome Trust, which
is a "charity" in British usage. See:
List of wealthiest
foundations. Note that this assessment excludes
universities, at least a few of which have assets
in the tens of billions of dollars. For example;
List of U.S.
colleges and universities by endowment
Measuring an NPO by its monetary size has obvious limitations, as
the power and significance of NPOs are defined by more qualitative
measurements such as effectiveness at carrying out charitable
mission and goals.
Some NPOs
which are particularly well known, often for the charitable or
social nature of their activities conducted over a long period of
time, include Amnesty
International, the Better
Business Bureau, Oxfam, Carnegie Corporation of New
York, DEMIRA
Deutsche Minenräumer (German Mine Clearers), Goodwill Industries, United Way, Habitat for Humanity, Teach For America, the Red Cross
and Red
Crescent
organizations, UNESCO
, IEEE, World Wide
Fund for Nature, Heifer
International, and SOS
Children's Villages.
However, there are also millions of smaller NPOs that provide
social services and relief efforts
on a more focused level (such as Crosswind — Community
Outreach Ministry and
Literacy
Center West) to people throughout the world. There are more
than 1.6 million NPOs in the United States alone.
On the Internet
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 commercially focused entities which typically use the
.com space.
In the traditional domain categories as 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 specifically designated for charitable organizations or any
specific organizational or tax-law status, however; it encompasses
anything that does not fall into another category. Currently, no
restrictions are enforced on registration of .com or .org, so you
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 fit particular sorts of organizations such as
.museum for museums or
.coop
for
cooperatives. Organizations might
also register under the appropriate
country code top-level domain
for their country.
Other terminology for the sector
There is a growing movement within the “non”-profit and
“non”-government sector to define itself using more proactive
wording. Instead of being defined by “non” words, organizations are
suggesting new terminology to describe the sector. The term “civil
society organization” (CSO) has been used by a growing number of
organizations, such as the Center for the Study of Global
Governance. The term “citizen sector organization” (CSO) has also
been advocated to describe the sector — as one of citizens,
for citizens — by organizations such as
Ashoka: Innovators for the
Public. This labels and positions the sector as its own entity,
without relying on language used for the government or business
sectors. However, use of terminology by a nonprofit of
self-descriptive language such as "public service organization" or
other term that is not legally compliant risks confusing the public
about nonprofit abilities, capabilities and limitations.
See also
References
- P. Hartigan, 2006,'It's about people, not profits', 'Business
Strategy Review' winter 2006
External links
Directories of Nonprofits
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