Non-profit organization

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A non-profit organization (abbreviated "NPO," or "non-profit" or "not-for-profit") is an organization whose primary objective is to support an issue or matter of private interest or public concern for non-commercial purposes, without concern for monetary profit. NPOs are active in a wide range of areas, including the environment, the arts, social issues, charities, early childhood education, health care, religion, research, sports and other endeavors. In many cases, those who have acquired excess of wealth turn to philanthropy and establish or provide support to such organizations.

Since those involved in running a non-profit organization must pursue goals that benefit the community, rather than personal profit, they are not bound by the competition of the business sector. In this way, NPOs serve the whole purpose of society, advancing goodness in diverse areas for the benefit of many.

Contents

Definition

A non-profit corporation is a corporation created by statute, government, or judicial authority that is not intended to provide a profit to the owners or members. A corporation that is organized to provide profits to its owners or members is a for-profit corporation. A non-profit corporation is always organized as a non-stock corporation.

A non-profit corporation is usually created with a specific purpose, such as for educational, charitable, or related to other enumerated purposes, it may be a foundation, a charity or other type of non-profit organization. In some cases it may also be a public corporation. In many countries these entities are subject to exemption from various tax laws, with certain restrictions.[1]

The use of the term "not-for-profit" rather than "non-profit" has been debated within the field. While there are definitive preferences for one term or the other, there is no broad consensus.[2]

For-Profit Distinction

The legal and ethical restrictions on the distribution of profits to owners or shareholders as what fundamentally distinguishes NPOs from commercial enterprises.

NPOs generally do not 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 also legally and ethically trade at a profit. The extent to which it can generate income may be constrained, or the use of those profits may be restricted. NPOs therefore are typically funded by donations from the private or public sector, and often have tax exempt status. Donations may sometimes be tax deductible.

Some 'non-profits' are operated by volunteers and/or paid positions. Additionally, an NPO may have members or participants or beneficiaries or students as opposed to customers in a for-profit organization. One should not generalize about the comparative cost of a 'non-profit' verses 'for profit' organization; there may be a significant internalized profit in a non-profit organization.

Legal aspects

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, 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 operate and carry out their activities. 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 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.

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, non-profit organizations offer to donors the advantage of deductions for the amount donated.

If an organization is to qualify for tax exempt status, the organization must specify that no part of its assets shall benefit any of persons who are members, directors, officers or agents (its principals). Also, the organization must have a legal charitable purpose, such that the organization was created to support educational, religious, or charitable activities. These elements do not mean that the organization cannot pay employees or contractors for work or services they render to the organization. This limitation means that as long as the organization operates within its exempt purposes and it maintains an endowment or uses any excess revenue to further develop its activities it will not be taxed by the Internal Revenue Service.

Not only must the organization meet the requirements the state where it is organized sets for non-profits, but it must also meet complex IRS regulations. These regulations are used not only to determine if the organization is exempt from tax under the organization's activities as a non-profit organization. If the organization purpose is one of those described in §501(c)(3) of the Internal Revenue Code, it may apply for a ruling that donations to it are tax deductible to the persons or business entities who make them. The organization itself will be exempt from taxation as long as it does not engage in unrelated business activities. As well the IRS has enacted intermediate sanctions should the members of the organization engage in practices that may excessively benefit any of the organizations members (or officers, directors, etc.) rather than revoking the organization's exempt status (which was the only option available before the adoption of intermediate sanctions) the IRS may now levy a penalty on the organization for engaging in a transaction that resulted in a private inurement or private benefit.[3]

Around the World

Canada

The Canada Customs and Revenue Agency (CCRA) (formerly Revenue Canada) is the government department responsible for granting organizations charitable tax status. The process routinely takes six months to 18 months and requires applicants to fulfill a number of requirements. One of the major advantages of obtaining charitable status, is that the organization is able to issue receipts to donors for income tax purposes. This can be a major advantage when soliciting for donations. In addition, charities receive certain tax exemptions. If an organization is created in Canada, is non-profit and is charitable in purpose, it may qualify as a charity within the meaning of the Income Tax Act. A non-profit corporation cannot issue tax deductible receipt simply because it is a non-profit corporation. It must first submit an application and be accepted as having charitable status.[4]

United States

Non-profit organizations in the United States are, like for-profit corporations, mostly organized and operated under the law of a state, rather than the federal government. There are some federally chartered charities, though, including the American Red Cross, the Boy Scouts of America, and the United States Olympic Committee.

Generally, non-profits and people operating non-profits must comply with all of the same laws which would apply to for-profit businesses. There are exceptions for taxes (noted above) and some exceptions related to First Amendment concerns, noted below. Directors and officers of non-profits owe a fiduciary duty to the non-profit and its beneficiaries similar to the duties owed by directors and officers of for-profit corporations. Non-profits can have vicarious liability for injuries caused by their employees or volunteers to third parties, such as by traffic accidents. For this reason it is prudent for any non-profit to obtain liability insurance. Non-profits which have paid staff must comply with minimum wage laws, and with the requirement in most states to obtain workers compensation insurance.

Churches and religious non-profits are something of a special case, because the First Amendment to the U.S. Constitution forbids the government making a law "respecting an establishment of religion" and also forbids "prohibiting the free exercise thereof [that is, of religion]." The First Amendment by its terms binds only the U.S. Federal Government, but its effect was extended to state and local governments in the U.S. by passage of the 14th Amendment at the close of the Civil War. Under the Religious Freedom Restoration Act many generally applicable state laws regarding employment, zoning and the like are relaxed for churches.

Similarly, some non-profits, as private organizations, are not subject to the anti-discrimination laws which might apply to similar organizations serving the public for profit. As an example, the Boy Scouts of America do not allow girls as Cub Scouts or Boy Scouts, and the courts have held this does not violate anti-discrimination laws.

Charity non-profits face many of the same challenges of corporate governance which face large, publicly traded corporations. Fundamentally, the challenges arise from the "agency problem"—the fact that the management which controls the charity is necessarily different from the people who the charity is designed to benefit. In a non-profit corporation, the "agency problem" is even more difficult than in the for-profit sector, because the management of a non-profit is not even theoretically subject to removal by the charitable beneficiaries. The board of directors of most charities is self-perpetuating, with new members chosen by vote of the existing members.

India

A Non Profit Organization can be registered in India as a Society, under the Registrar of Societies or as a Trust, by making a Trust deed. A third option is registration as a section-25 Company under the Companies Act, 1956.

Whether a trust, society or section-25 company, the Income Tax Act of 1961 gives all categories equal treatment, in terms of exempting their income and granting 80G certificates, whereby donors to non-profit organizations may claim a rebate against donations made. Foreign contributions to non-profits are governed by FC(R)A regulations and the Home Ministry.

For an organization to be termed as Charity it has take Income tax clearances under 12 A Clause of Income Tax Act. Section 2(15) of the Income Tax Act defines ‘charitable purpose’ to include ‘relief of the poor, education, medical relief and the advancement of any other object of general public utility’. A purpose that relates exclusively to religious teaching or worship is not considered as charitable.

Non-profit organizations in India (a) exist independently of the state; (b) are self-governed by a board of trustees or ‘managing committee’/ governing council, comprising individuals who generally serve in a fiduciary capacity; (c) produce benefits for others, generally outside the membership of the organization; and (d), are ‘non-profit-making’, in as much as they are prohibited from distributing a monetary residual to their own members.

United Kingdom

In England and Wales, NPOs which take the form of charities must generally 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.[5]

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.[5]

Prevention of charitable fraud is mostly a function of state governments, and is typically the responsibility of state attorneys general. Charitable solicitation laws vary widely from state to state. The United States has a very strong tradition of government non-interference in religion, expressed in the "free exercise" clause of the First Amendment. Thus, regulation of religious fraud (nominally religious organizations being run purely for the private benefit of the "minister") is very weak.

Examples

The largest NPO in the world is 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 Spring 2006). The second largest is the Howard Hughes Medical Institute, which has an endowment of approximately $14.8 billion. Elsewhere in the world, the largest NPO is probably the British Wellcome Trust, which is a "charity" in British usage. Note that this assessment excludes universities, at least a few of which have assets in the tens of billions of dollars.

Some NPOs which are particularly well known, often for the charitable or social nature of their activities conducted over a long period of time, including:

Notes

  1. John Yankey, Effectively Managing Nonprofit Organizations (Fieldstone Alliance, 2006, ISBN 978-0940069374).
  2. Elliott Alvarado, 2000, Nonprofit or Not-for-profit—Which Are You? Nonprofit World, Volume 18. Action Without Borders. Retrieved March 14, 2008.
  3. Lester Salamon, The Resilient Sector: The State of Nonprofit America (Brookings Institution Press, 2003, ISBN 978-0815776796).
  4. Corporation Centre. 2005, Canadian Non Profit Retrieved March 14, 2008.
  5. 5.0 5.1 Stephen Block, Why Nonprofits Fail: Overcoming Founder's Syndrome, Fundphobia and Other Obstacles to Success (Jossey-Bass, 2003, ISBN 978-0787964092).

References

  • Block, Stephen. 2003. Why Nonprofits Fail: Overcoming Founder's Syndrome, Fundphobia and Other Obstacles to Success. Jossey-Bass. ISBN 978-0787964092
  • Connolly, Paul, and Carol Lukas. 2002. Strengthening Nonprofit Performance: A Funder's Guide to Capacity Building. Fieldstone Alliance. ISBN 978-0940069374
  • Light, Paul. 2004. Sustaining Nonprofit Performance: The Case for Capacity Building and the Evidence to Support It. Brookings Institution Press. ISBN 978-0815752257
  • Salamon, Lester. 2003. The Resilient Sector: The State of Nonprofit America. Brookings Institution Press. ISBN 978-0815776796
  • Yankey, John. 2006. Effectively Managing Nonprofit Organizations. Fieldstone Alliance. ISBN 978-0940069374

External links

All Links Retrieved March 14, 2008.

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