Non-profit organization

Non-profit organization

A non-profit 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. In many countries some NPOs will be charities, but there will also be many NPOs which are not charitable organizations.

For-profit distinction

Whereas profit-making corporations exist under the premise of earning and distributing taxable business earnings to shareholders, the non-profit organization exists primarily to provide programs and services that are of benefit to others and might not be otherwise provided by local, state, or federal entities. While they are able to earn a profit, more accurately called a surplus, such earnings are retained by the organization for its future provision of programs and services, and are not owned by nor distributed to individuals or stake-holders. In the United States, the laws governing charitable non-profits are based around the Internal Revenue Code, Section 501(c)(3) and the tax-deductible contribution guidelines of Section 170. Corporations classified as such, with gross receipts over $25,000, must report financial activity annually to the IRS, by means of a Form 990.

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

NPOs can attain tax exempt status but such status is not automatic. 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. Additionally, an NPO may have "members" or "participants" or "beneficiaries" or "students" etc. as opposed to "customers" in for-profit organizations. They require a board of directors, governance in accord with by-laws or an organizing document, such as a charter or declaration of trust.

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.Fact|date=July 2007

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 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, not even its own members if the leadership chooses.

Formation and structure

In the United States of America, 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.

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 [ [ FairVote - Board of Directors ] ] [ [ FairVote - FAQs ] ] and the National Organization for the Reform of Marijuana Laws. [ [ NORML Board of Directors - NORML ] ] 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 [ [ American Society of Association Executives Bylaws - About Us - ASAE & The Center for Association Leadership ] ] 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. [citation|title=ABA Code Revision Raises Concerns for Democracy and Parliamentary Law in Nonprofits|author=Malamut, Michael E. and Blach, Thomas J.|publisher=National Parliamentarian, Volume 69, No. 1|date=2008] ["Charity on Trial: What You Need to Know Before You Give" / Doug White (2007) ISBN 1569803013 ] 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. [ [ SSRN-Voluntary Disclosure in Nonprofit Organizations: an Exploratory Study by Bruce Behn, Delwyn DeVries, Jing Lin ] ]

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.

Nonprofit organizations offer to donors the advantage of deductions for the amount donated.


:"For a United States analysis of this issue, see 501(c)."

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. [cite web| url=,,id=96106,00.html| title=Special rules for unrelated business income tax| publisher=U.S. Internal Revenue Service| accessdate=2007-08-19] 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."


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. Fact|date=December 2007

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.


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).Fact|date=May 2008, 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 and relief efforts on a more focused level (such as Crosswind - Community Outreach Ministry) or the arts to people throughout the world and in the US. 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 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. [:Glasius, Marlies, Mary Kaldor and Helmut Anheier (eds.) [ "Global Civil Society 2006/7"] . London: Sage, 2005.] The term “citizen sector organization” (CSO) has also been advocated to describe the sector — as one of citizens, for citizens — by organizations such as . [Drayton, W: [ "Words Matter"] . Alliance Magazine, Vol. 12/No.2, June 2007] 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. [Alvarado, Elliott I.: "Nonprofit or Not-for-profit -- Which Are You?", page 6-7. Nonprofit World, Volume 18, Number 6, November/December 2000]

ee also

*Association without lucrative purpose
*Charity badge
*Charity Navigator
*Community Organizations
*501(c) - Tax status in the United States
*Foundation (charity)
*ISO/IEC 20000
*Mutual organization
*Non-governmental organization (NGO)
*Non-profit sector
*Nonprofit technology
*Occupational safety and health
*Private voluntary organization
*Program evaluation
*Social economy
*Supporting organization (charity)


*United States of America non-profit laws


External links

* [ Stanford Project on Emerging Nonprofits] A Stanford study about nonprofit management practices.
* [] , a database of 50,000 organizations around the world.

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