Non-profit organization Totally Explained

Everything about Non-profit totally explained

A nonprofit organization (abbreviated "NPO", also "not-for-profit") is a legally constituted organization whose objective is to support or engage in activities of public or private interest without any commercial or monetary profit. NPOs are active in the environment, humanitarian aid, animal protection, education, the arts, social issues, charities, health care, politics, religion, research, sports or other endeavors.

For-profit distinction

Most experts consider the legal and ethical restrictions on the distribution of profits to owners or shareholders as what fundamentally distinguishes NPOs from commercial enterprises. The use of the term "not-for-profit" rather than "nonprofit" has been debated within the field. While there are definitive preferences for one term or the other, there's no broad consensus.
   NPOs generally don't operate to generate profit, a characteristic widely considered to be defining of such organizations. However, an NPO may accept, hold and disburse money and other things of value. It may legally and ethically trade at a profit or hold investments, usually restricted to use any funds resulting from such commercial enterprises, solely and exclusively for attaining the organization's aims. The extent to which it can generate income may be constrained in amount, methods or both, and the use of those profits may be restricted not only in purpose but in proportions regarding self-maintenance and achievement of purpose. NPOs therefore are typically funded by donations from the private, public sector, or both, as well as from program service fees. NPOs can attain tax exempt status but such status isn't inherent to its formation and must be specifically requested to the tax supervising authority. Donations may sometimes be tax deductible.
   Many non-profits are operated by either volunteers, paid staff or a combination of both, usually reserving the senior executive positions to paid personnel while the entry-level and field positions are frequently held by volunteers. Recently, some paid positions have come under question as the salaries of top level executives were in the millions of dollars per year. Additionally, an NPO may have members or participants or beneficiaries or students etc. as opposed to customers in for-profit organizations.
   One shouldn't generalize about the comparative cost of a "nonprofit" versus "for profit" organization; there may be internalized profit in a nonprofit organization. In fact, most successful NPO's generate a surplus of funds (more income than expenses) that can be held to generate additional income and pay operating expenses when other income streams weaken. With a number of NPO's, the only distinction between them and a for-profit company is that ownership lies in stake-holders, and not investors. Any net income is used to further the organization's goal (whether that be paying for programs or investing for security), rather than being distributed to share-holders, partners or owners.

Nature and goals

NPOs often are 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're also called foundations, or endowments that have large stock funds. A very similar organization called the supporting organization operates like a foundation, but: they're more complicated to administer, they're 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 (for example Germany, Sweden, Finland), NPOs typically are voluntary associations, although some have a corporate structure (for example 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:

Legal requirements followed for establishment
Purpose
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 won't 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're 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, not even its own members if the leadership chooses.

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 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 doesn't issue stock or pay dividends, (for example, The Code of the Commonwealth of Virginia includes the Non-Stock Corporation Act that's 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, and (in some cases) so that financial donors may claim back any income tax paid on donations, or deduct from their own tax liability the amount of the donation.
Only limited types of tax exempt, nonprofit organizations offer to donors the advantage of deductions for the amount donated. � For a United States analysis of this issue, see 501(c).

In the United States, after a recognized type of legal entity has been formed at the state level, it's 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 doesn't apply to other Federal taxes such as employment taxes. Additionally, a tax-exempt organization must pay federal tax on income that's unrelated to their exempt purpose. Failure to maintain operations in conformity to the laws may result in an organization losing its tax exempt status.
Also in the United States, individual states and localities offer nonprofits exemptions from other taxes such as sales tax or property tax. Federal tax-exempt status doesn't 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 which take the form of charities must generally be registered with the Canada Revenue Agency.

United Kingdom

In England and Wales, charities generally must 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 in the U.S., 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

The largest Non-Profit Organization in the U.S. is the United States Federal Government, which generates trillions of dollars annually, and has endowments which exceed $400 billion on a monthly basis. Other large NPOs are the Bill and Melinda Gates Foundation, which has an endowment of approximately $60 billion ($27 billion from the Gates and $30 billion from Warren Buffett in early 2006)., 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 Of course 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, 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 or the arts to people throughout the world. There are more than 1.6 million NPOs in the United States alone. For more see

On the Internet

Many NPOs often use the .org or .us (or the CCTLD of their respective country) or .edu top-level domain 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's the proper category for non-commercial organizations if they're not governmental, educational, or one of the other types with a specific TLD. It isn't specifically designated for charitable organizations or any specific organizational or tax-law status, however; it encompasses anything that doesn't 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 . 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 isn't legally compliant risks confusing the public about nonprofit abilities, capabilities and limitations.

Further Information

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