Non-profit organization

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, politics, religion, research, sports or other endeavors.

Definition

A not-for-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. Such a corporation is subject to the general laws of corporations as adapted. In some cases it may also be a public corporation. In many countries these entities are subject to exemption from various tax laws, in certain circumstances. Regarding the more general group of organizations created for non-remunitary purposes see: Non-profit organization.

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 "non-profit" has been debated within the field. While there are definitive preferences for one term or the other, there is no broad consensus.

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. Recently some paid positions have come under question as the salaries of top level executives were in the millions of dollars per year. Additionally, a NPO may have members or participants or beneficiaries or students etc. 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 lot of 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 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 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.

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 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.

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 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.

Religious Entities in U.S.

In the United States, the First Amendment guarantees freedom of religion, however religious non-profit entities like churches are subject to less rigorous federal filing and reporting requirements than many other tax-exempt organizations. Depending on the state in which they are located, they may also be exempt from some of the inspections or regulations governing non-religious groups performing the same services. Religious organizations usually take the form of a religious corporation

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, 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.

United States of America non-profit laws

Laws regarding non-profit organizations in the United States of America relate to taxation, the special problems of an organization which does not have profit as its primary motivation, and prevention of charitable fraud. Some non-profit organizations can broadly be described as "charities" - like the American Red Cross. Some are strictly for the private benefit of the members - like country clubs, or condominium associations. Others fall somewhere in between - like labor unions, chambers of commerce, or cooperative electric companies. Each presents unique legal issues.

Taxation

If an organization is to qualify for tax exempt status, the organization's (a) charter — if a not-for-profit corporation — or (b) trust instrument — if a trust — or (c) articles of association — if an association — must specify that no part of its assets shall benefit any of persons who are members, directors, officers or agents (its principals). As well the organization must have a legal, charitable purpose, i.e. the organization must be 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.

Such a surplus — that is, whatever part of its income is left after its operating expenses are paid — which might be considered similar to "profit" — must be spent on the charitable or public purpose(s) for which it was organized, not paid as a dividend or benefit to anyone associated with running or organizing it.

Not only must the organization meet the requirements the state where it is organized sets for non-profits, but it must also meet complex I.R.S. 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 I.R.S. may now levy a penalty on the organization for engaging in a transaction that resulted in a private inurement or private benefit. See the entry on intermediate sanctions for more detailed information.

Due to differing requirements by the states and the federal government, it is possible to be recognized as a non-profit organization by the state, but not by the federal government. Such an organization would be exempt from state taxes, but not from federal taxes. This may actually be desirable in certain limited circumstances. For example, federally tax-exempt organizations are generally prohibited from influencing elections and legislation, whereas the state may or may not prohibit non-profits from that activity. If you wish to receive grants and donations, it is generally necessary to be a federally recognized non-profit (i.e. 501(c)3 or similar designation). Contributions made to federally recognized non-profits (such as 501(c)3 entities) would typically be tax deductible for the person or entity giving the donation.

Special Problems of Organizing a Non-Profit

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.

Prevention of Charitable Fraud

In the United States, 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.

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 NPO in the United States (and the world) is the Bill and Melinda Gates Foundation, which has an endowment of approximately $60 billion ($27 billion from the Gateses 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.

Of course measuring a 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, the Red Cross and Red Crescent organizations, UNESCO, IEEE, World Wide Fund for Nature 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 Wikipedia articles on non-profit organizations

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 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.

External links

• Stanford Project on Emerging Nonprofits A Stanford study about nonprofit management practices.
• Legal Information for Nonprofit Organizations Checklist for establishing and running a nonprofit organization
• Idealist.org, a database of 50,000 organizations around the world.
• Charities Directorate (Canada).

• Free Questions and Answers About Nonprofits in the United States provided by Allexperts.com
• GuideStar searchable directory of nonprofit organizations and governance information

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