Non-profit organization

From Open Encyclopedia

A nonprofit organization (sometimes abbreviated to "not-for-profit," "non-profit","NPO" or "NGO" for non-governmental organization) is an organization whose primary objective is to support some issue or matter of private interest or public concern for non-commercial purposes. Nonprofits may be involved in an innumerable range of areas relating to the arts, charities, education, politics, religion, research, or some other endeavor.

Nonprofits do not operate to generate profit, and this characteristic is popularly considered to be the defining characterisitic of such organizations. However most experts consider that it is the legal and ethical restrictions on the distribution of profits to owners or shareholders which fundamentally distinguishes non-profits from commercial enterprises.

Nonprofits must still generate revenue in order to finance their activities, but the extent to which they can generate income may be constrained, or its use may be restricted. Nonprofits are therefore typically funded by donations from the private or public sector, and often have tax exempt status. Private donations may sometimes be tax deductible.

A charity is a type of non-profit organization, and some non-governmental organizations may also be nonprofit organizations.

1 Nature and goals
2 Legal aspects
3 Issues faced by non-profits
4 Examples
5 See also
- 5.1 Laws
6 External links

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Nature and goals

Nonprofit organizations 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. Most foundations give out grants to other not-for-profit organizations, or fellowships to individuals. However, the name foundation may be used by any not-for-profit corporation -- even volunteer organizations or grass roots groups. A nonprofit organization may be a very loosely organized group such as a block association, or a trade union, or it may be a complex structure such as a university, hospital, documentary film production company or educational book publisher.

In many countries applying Germanic or Nordic law (e.g. Germany, Sweden, Finland), nonprofit organizations are typically voluntary associations, although some have a corporate structure (e.g. housing corporations). A voluntary association is usually founded upon a principle of one man–-one vote. A large, nation-wide organization is usually organized as a league: the local level has a town- or county-level association with natural person membership, these associations being members of the national association. This is perceived to give the local level the maximal autonomy, while it also protects the organization from financial blunders of any single association. The organization of such league (e.g. trade union or a party) may be extremely complex. Often there are separate laws regulating usual, "idealist" associations (anything from a sports club to trade union), political parties and religious denominations, restricting each type of organization to its chosen field.

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Legal aspects

Most countries have laws which regulate the establishment and management of nonprofit organizations, 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 nonprofit 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, not even its own members if the leadership choose.

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Formation and structure

In the United States, nonprofit organizations are normally 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 or Board of Trustees. Not-for-profit organizations 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.

Some critics of corporations argue that when corporations donate to charities to reduce taxes, the companies whitewash their reputations, sometimes benefitting in terms of marketing and public relations purposes. In some countries, e.g. in Europe, the idea of deductible donations is not endorsed as it is considered to violate the popular sovereignty. In a democracy, the people, i.e. the parliament, arguably should be able to decide where the tax money goes. Some people believe that when donors who indirectly decide on the use of their taxes, the donors are engaging in an act that should be the privilege of parliament, not of individuals. In countries where donations are not tax-deductible, the state may assume a larger role in supporting nonprofit organizations.

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Tax exemption

In many countries, nonprofit organizations may apply for tax exempt status, so that financial donors may claim back any income tax paid on donations and so that the organization itself may be exempt from income tax. In the United States, after a recognized legal entity has been formed at the state level, it is customary for the nonprofit corporation to seek tax exempt status. That is done by applying to the Internal Revenue Service (IRS). The IRS, after reviewing the application to ensure the purpose of the organization meets the conditions to be recognized as a tax exempt organization (such as a charity), issues an authorization letter to the nonprofit organization granting it tax exempt status.

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United Kingdom

In the United Kingdom non-profit organizations are rarely considered as a single class of entity. All philanthropic organizations must be registered with the Charity Commission and they are referred to as charities, not as nonprofits. Other groups which are classified as nonprofit organizations in the U.S., such as trade unions, are subject to separate regulations, and are not conflated with charities in British usage.

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Issues faced by non-profits

Main article: Capacity building

Capacity support is a chronic issue faced by all nonprofits that rely on external funding to maintain their operations. Often nonprofit capacity needs do not reflect donor priorities.

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Examples

The largest nonprofit organization in the United States is the Bill and Melinda Gates Foundation, which has an endowment of approximately $27 billion. The second-largest is the Howard Hughes Medical Institute, which has an endowment of approximately $11 billion. Elsewhere in the world, the largest nonprofit organization is probably the British Wellcome Trust, though it is a "charity" in British usage, not a "nonprofit". Note that this assessment excludes universities, at least a few of which have assets in the tens of billions of dollars.

Some nonprofits which are particularly well known, often for the charitable or social nature of their activities conducted over a long period of time, include the following organisations.

However, there are also millions of smaller nonprofit organizations that provide social services or the arts to people throughout the world. There are more than 1.6 million nonprofits in the United States alone.

Many nonprofit organizations use the .org top-level domain when selecting a domain name to differentiate themselves from more commercially-focussed entities which typically use the .com space.

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