Nonprofit organization

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A nonprofit organization (NPO) or not-for-profit organization is an organization that uses surplus revenues to achieve its goals rather than distributing them as profit or dividends.12

While not-for-profit organizations are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion, or plans.3 NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who work with or without compensation (occasionally nominal).4 Where there is a token fee, in general, it is used to meet legal requirements for establishing a contract between the executive and the organization.

Designation as a nonprofit does not mean that the organization does not intend to make a profit, but rather that the organization has no owners and that the funds realized in the operation of the organization will not be used to benefit any owners. The extent to which an NPO can generate surplus revenues may be constrained or use of surplus revenues may be restricted.

Objectives and Goals

Some NPOs may also be a charity or service organization; they may be organized as a not-for-profit corporation or as a trust, a cooperative, or they exist informally. A very similar type of organization termed a supporting organization operates like a foundation, but they are more complicated to administer, hold more favorable tax status and are restricted in the public charities they support. Their goal is not to be successful in terms of wealth, but in terms of giving value to the groups of people they administer to.5

Functions

NPOs have a wide diversity of structures and purposes. For legal classification, there are, nevertheless, some elements of importance:

  • 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 charter 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 by 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 publicly. In many aspects they are similar to corporate business entities though there are often significant differences. Both not-for-profit and for-profit corporate 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, including church members.

Formation and structure

In the United States, nonprofit organizations are formed by filing bylaws and/or articles of incorporation in the state in which they expect to operate. The act of incorporating creates a legal entity enabling the organization to be treated as a corporation by 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, Board of Governors or Board of Trustees. A nonprofit may have a delegate structure to allow for the representation of groups or corporations as members. Alternatively, it may be a non-membership organization and the board of directors may elect its own successors.

The two major types of nonprofit organization 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 that the organization does not have any membership, although the organization's literature may refer to its donors as "members"; examples of such organizations are Fairvote67 and the National Organization for the Reform of Marijuana Laws.8 The Model Nonprofit Corporation Act imposes many complexities and requirements on membership decision-making.citation needed Accordingly, many organizations, such as Wikimedia,9 have formed board-only structures. The National Association of Parliamentarians has generated concerns about the implications of this trend for the future of openness, accountability, and understanding of public concerns in nonprofit organizations. Specifically, they note that nonprofit organizations, unlike business corporations, are not subject to market discipline for products and shareholder discipline of their capital; therefore, without membership control of major decisions such as election of the board, there are few inherent safeguards against abuse.1011 A rebuttal to this might be that as nonprofit organizations grow and seek larger donations, the degree of scrutiny increases, including expectations of audited financial statements.12

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. In the United States, to be exempt from federal income taxes the organization must meet the requirements set forth by the Internal Revenue Service.13

Australia

In Australia, nonprofit organizations can be categorized variously: Unincorporated Associations, Co-operative Societies, Incorporated Associations, Not-for-profit Companies, and Trusts. A nonprofit organisation in Australia can have a number of legal formats depending on the needs and activities of the organization in question. As a legal entity, the organization may be a co-operative society, a company limited by guarantee, an incorporated association or society by the Associations Incorporation Act 1985 or an incorporated association or council by the Commonwealth Aboriginal Councils and Associations Act 1976.14

In Australia, non-profit organisations are normally established in one of three ways: companies, trusts and incorporated associations. However, incorporated associations are specifically for organisations that are going to operate just within one of the Australian states. Therefore, in practice, non-profit organisations seeking to establish in Australia should think of starting as a company or as a trust.15

Belgium

By Belgian law, there are several kinds of nonprofit organisations:

These three kinds of nonprofit organisations are in contrast to a fourth:

Canada

Canada allows nonprofits to be incorporated or unincorporated. Nonprofits may incorporate either federally (under Part II of the Canada Corporations Act) or provincially, by widely varying provincial legislation. Many of the governing Acts for Canadian nonprofits date to the early 1900s, meaning that nonprofit legislation has not kept pace with legislation that governs for-profit corporations; particularly with regards to corporate governance. Federal, and in some provinces (such as Ontario), incorporation is by way of Letters Patent, and any change to the Letters Patent (even a simple name change) requires formal approval by the appropriate government, as do by-law changes. Other provinces (such as Alberta) permit incorporation as of right, by the filing of Articles of Incorporation or Articles of Association.

During 2009, the federal government enacted new legislation repealing the Canada Corporations Act, Part II - the Canada Not-for-Profit Corporations Act. This Act was last amended on October 10, 2011 and the act was current till March 4, 2013.16 It allows for incorporation as of right, by Articles of Incorporation; does away with the ultra vires doctrine for nonprofits; establishes them as legal persons; and substantially updates the governance provisions for nonprofits. Ontario also overhauled its legislation, adopting the Ontario Not-for-Profit Corporations Act during 2010; pending the outcome of an anticipated election during October 2011,dated info the new Act is expected to be in effect as of July 1, 2013.

Canada also permits a variety of charities (including public and private foundations). Charitable status is granted by the Canada Revenue Agency (CRA) upon application by a nonprofit; charities are allowed to issue income tax receipts to donors, must spend a certain percentage of their assets (including cash, investments and fixed assets) and file annual reports in order to maintain their charitable status. In determining whether an organization can become a charity, CRA applies a common law test to its stated objects and activities. These must be:

  • The relief of poverty;
  • The advancement of education;
  • The advancement of religion; or
  • certain other purposes that benefit the community in a way the courts have said is charitable17

Charities are not permitted to engage in political activity; doing so may result in the revocation of charitable status.

Finland

In Finland, "rekisteröity yhdistys", given the abbreviation ry, denotes a registered association. This is done at a cost of 100 Euro. The association is required by law to keep a list of members. It must also hold an AGM and at least 3 members are required to initiate it, a secretary, chairperson and treasurer being the usual format.

France

In France, the nonprofits are called association. They are based on a law voted the 1st of July 1901. As a consequence, the nonprofits are also called association loi 1901.

A nonprofits can be created by 2 people in order to accomplish a common goal, whatever it is. The association can have industrial and/or commercial activities but the members cannot get any profit from these activities. Thereby, worker's unions and political parties can be organised from this law.

In 2008, the national statistic institute (INSEE) counted that there are more than 1 million of these associations in the country, about 16 millions people older than 16 are members of a nonprofit in France, that to say a third or the population. The nonprofits employ 1.6 million people and 8 millions are volunteers for them.18

This law is also relevant in a big part of former French colonies, particularly in Africa.

Hong Kong

The Hong Kong Company Registry provides a memorandum of procedure for applying to Registrar of Companies for a Licence under Section 21 of the Companies Ordinance (Cap.32) for a limited company for the purpose of promoting commerce, art, science, religion, charity, or any other useful object.1920

India

In India, NPOs are known commonly as Non-Governmental Organizations (NGOs).21

They can be registered in four ways:

  1. Trust
  2. Society
  3. Section-25 Company
  4. Special Licensing

Registration can be done with the Registrar of Companies(RoC).

The following laws or Constitutional Articles of the Republic of India are relevant to the NGOs:

  • Articles 19(1)(c) and 30 of the Constitution of India
  • Income Tax Act, 1961
  • Public Trusts Acts of various states
  • Societies Registration Act, 1860
  • Section 25 of the Indian Companies Act, 1956
  • Foreign Contribution (Regulation) Act, 1976

Ireland

The Irish Nonprofits Database was created by Irish Nonprofits Knowledge Exchange (INKEx) to act as a repository for regulatory and voluntarily disclosed information about Irish public benefit nonprofits. The database lists more than 10,000 not for profit organisations in Ireland. INKEx is currently looking for Government funding to continue to provide the service and maintain the accuracy of the database.

Japan

In Japan, an NPO is any citizen's group that serves the public interest and does not produce a profit for its members. NPOs are given corporate status to assist them in conducting business transactions. As of February 2011, there were 41,600 NPOs in Japan. Two hundred of NPOs were given tax-deductible status by the government which meant that only contributions to those organization were tax deductible for the contributors.22

Russia

Russian law contains many legal forms of NCOs (non-commercial organizations), resulting in a complex and often contradictory regulatory framework. The primary requirements are that NCOs, whatever their type, do not have the generation of profit as their primary objective and do not distribute any such profit among their participants (Article 50(1), Civil Code). Most commonly there are five forms of NCOs:

  1. Public associations - A public association is the form most comparable to an "association" as used in international parlance. A public association is a membership-based organization of individuals who associate on the basis of common interests and goals stipulated in the organization's charter.
  2. Foundations - Foundations are property-based, non-membership organizations created by individuals and/or legal persons to pursue social, charitable, cultural, educational, or other public benefit goals.
  3. Institutions - The institution (uchrezhdeniye) is a form that exists in Russia and several other countries of the Former Soviet Union. Like foundations, institutions do not have members. Unlike foundations, however, institutions do not acquire property rights in the property conveyed to them (Article 120, Civil Code, and Article 20, NCO Law). Moreover, the founders are liable for any obligations of the institution that it cannot meet on its own.
  4. Non-commercial partnerships - A non-commercial partnership (NP) (Article 8, NCO Law) is a membership organization pursuing activities for the mutual benefit of members. Therefore, assets which have been transferred to an NP as donations can be used for purposes other than those having public benefit.
  5. Autonomous non-commercial organizations - An autonomous non-commercial organization (ANO) (Article 10, NCO Law) is a non-membership organization undertaking services in the field of education, social policy, culture, etc., which in practice often generates income by providing its services for a fee.23

South Africa

In South Africa, charities issue a tax certificate when requested by donors which can be used as a tax deduction by the donor.24 Non Profit Organisations are registered under the Non Profit Organisation Act. Trusts are registered by the Master of the High Court. Section 21 Companies are registered under the Company's Act. All are classified as Voluntary Organisations and all must be registered with the South Africa Revenue Services "SARS".citation needed

United Kingdom

In the UK, many nonprofit companies are incorporated as a company limited by guarantee. This means that the company does not have shares or shareholders, but it has the benefits of corporate status. This includes limited liability for its members and being able to enter into contracts and purchase property in its own name. The goals ("objects") of the company are defined in the Memorandum of Association when the company is formed. The profits of the company (also referred to as the trading surplus) must be invested in achieving these goals and not distributed to the company's members.25

Since the Companies Act 2006, nonprofit companies may be formed as a Community Interest Company (CIC). These are forms of company limited by guarantee or company limited by shares but with special conditions and are intended specifically to ensure that the profits and assets of the company are used for the public good, even when managed for (limited) profit.26

A charity is a nonprofit organisation that meets stricter criteria regarding its purpose and the method in which it makes decisions and reports its finances.27 For example, a charity is generally not allowed to pay its Trustees. In England and Wales, charities may be registered with the Charity Commission.28 In Scotland, the Office of the Scottish Charity Regulator serves the same function. Other organizations which are classified as nonprofit organizations elsewhere, such as trade unions, are subject to separate regulations, and are not regarded as "charities" in the technical sense.

United States

For a United States analysis of this issue, see 501(c) and Charitable organization (United States).

After a nonprofit organization has been formed at the state level, the organization may seek recognition of tax exempt status with respect to U.S. federal income tax. That is done typically 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.29 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, and vice versa. These exemptions generally have separate applications 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. A tax exempt organization's 990 forms are required to be made available for public scrutiny.

Problems experienced by NPOs

Capacity building is an ongoing problem experienced 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, create programs, or maintain tax-exempt status. For example, a university that sells research to for-profit companies may have tax exemption problems. In addition, unreliable funding, long hours and low pay can result in employee retention problems. During 2009, the US government acknowledged this critical need by the inclusion of the Nonprofit Capacity Building Program in the Serve America Act. Further efforts to quantify the scope of the sector and propose policy solutions for community benefit were included in the Nonprofit Sector and Community Solutions Act, proposed during 2010.

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 of the organization, even as new employees or volunteers want to expand the project's scope or change policy.

Resource mismanagement is a particular problem with NPOs because the employees are not accountable to anybody with a direct stake in the organization. For example, an employee may start a new program without disclosing its complete liabilities. The employee may be rewarded for improving the NPO's reputation, making other employees happy, and attracting new donors. Liabilities promised on the full faith and credit of the organization but not recorded anywhere constitute accounting fraud. But even indirect liabilities negatively affect the financial sustainability of the NPO, and the NPO will have financial problems unless strict controls are instated.30 Some commentators have also argued that receiving significant funding from large for-profit corporations can ultimately alter the NPO's functions.313233

Articles of association (example)

Front building of the Bill & Melinda Gates Foundation in Seattle

In the United States, two of the wealthiest nonprofit organizations are the Bill and Melinda Gates Foundation, which has an endowment of $38 billion,34 and the Howard Hughes Medical Institute originally funded by Hughes Aircraft 35 prior to divestiture, 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" by 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.

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 performing charitable missions.

Some NPOs which are particularly well known, often for the charitable or social nature of their activities performed during a long period of time, include Amnesty International, Oxfam, Rotary International, Carnegie Corporation of New York, Nourishing USA, DEMIRA Deutsche Minenräumer (German Mine Clearers), FIDH International Federation for Human Rights, Goodwill Industries, United Way, ACORN (now defunct), Habitat for Humanity, Family Promise, Teach For America, the Red Cross and Red Crescent organizations, UNESCO, IEEE, INCOSE, World Wide Fund for Nature, Heifer International, Translators Without Borders and SOS Children's Villages.

However, there are also millions of smaller NPOs that provide social services and relief efforts to people throughout the world. There are more than 1.6 million NPOs in the United States alone, and millions more informal, community-based entities, which Frumkin and others consider part of the nonprofit sector.36

There are also examples, for instance in Ireland of NGO umbrella organisations bringing about a degree of self-regulation in the NGO sector.

Other information

Many NPOs often use the .org or .us (or the CCTLD of their respective country) or .edu top-level domain (TLD) when selecting a domain name to differentiate themselves from more commercial entities which typically use the .com space.

In the traditional domain 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 designated specifically for charitable organizations or any specific organizational or tax-law status, however; it encompasses anything that is not classifiable as another category. Currently, no restrictions are enforced on registration of .com or .org, so one 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 apply to particular sorts of organizations such as .museum for museums or .coop for cooperatives. Organizations might also register by the appropriate country code top-level domain for their country.

Conclusion

Instead of being defined by "non" words, some organizations are suggesting new, positive-sounding 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.37 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.38 A more broadly-applicable term, "Social Benefit Organization" (SBO) has been advocated for by organizations such as MiniDonations.39 Advocates argue that these terms describe the sector in its own terms, without relying on terminology used for the government or business sectors. However, use of terminology by a nonprofit of self-descriptive language that is not legally compliant risks confusing the public about nonprofit abilities, capabilities and limitations.40

In some Spanish-language jurisdictions, nonprofit organizations are called "civil associations".

See also

References

  1. ^ The Nonprofit Handbook: Everything You Need to Know to Start and Run Your Nonprofit Organization (Paperback), Gary M. Grobman, White Hat Communications, 2008.
  2. ^ [1]
  3. ^ "Publication 4220 (Rev. 8-2009)" (PDF). Retrieved 31 July 2010. 
  4. ^ Drucker, Peter (1989). "What Business Can Learn from Nonprofits". Harvard Business Review: 1-7.
  5. ^ "Nonprofit Business Goals and Objectives". Retrieved 23 March 2013. 
  6. ^ FairVote - Board of Directors.
  7. ^ FairVote - FAQs.
  8. ^ NORML Board of Directors - NORML.
  9. ^ "Bylaws". Wikimedia Foundation. 14 July 2010. Retrieved 31 July 2010. 
  10. ^ Malamut, Michael E. and Blach, Thomas J. (2008). ABA Code Revision Raises Concerns for Democracy and Parliamentary Law in Nonprofits. National Parliamentarian, Volume 69, No. 1. 
  11. ^ Charity on Trial: What You Need to Know Before You Give / Doug White (2007) ISBN 1-56980-301-3.
  12. ^ SSRN-Voluntary Disclosure in Nonprofit Organizations: an Exploratory Study by Bruce Behn, Delwyn DeVries, Jing Lin.
  13. ^ "Applying for Exemption - Difference Between Nonprofit and Tax-Exempt Status". Irs.gov. Retrieved 18 October 2012. 
  14. ^ "Legal structures of nonprofit organisations in Australia". Ourcommunity.com.au. Retrieved 30 January 2011. 
  15. ^ David Ford, Emil Ford Lawyers, Guide to Establishing Non-Profit Organisations in Australia (Advocates for International Development, August 2012). http://a4id.org/sites/default/files/user/%5BA4ID%5D%20AustraliaNon-ProfitLawLegalGuide.pdf
  16. ^ "Canada Not-for-profit Corporations Act". Status Of Canada. Retrieved 22 March 2013. 
  17. ^ "Charities and Giving; What is Charitable". Canada Revenue Agency. Retrieved 28 June 2011. 
  18. ^ Vie associative : 16 millions d’adhérents en 2008, INSEE, publication December 2010
  19. ^ http://forum.hktdc.com/topic/2245/1/en/Non-profit-organisation-in-Hong-Kong.htm
  20. ^ http://www.hkicpa.org.hk/APLUS/0704/44.pdf
  21. ^ book keeping and accounting. govt.of maharashtra. 
  22. ^ Kamiya, Setsuko, "NPO tax status threatened by Diet split", Japan Times, 22 February 2011, p. 3.
  23. ^ http://www.usig.org/countryinfo/russia.asp
  24. ^ South African Charities.
  25. ^ ""Company Limited by Guarantee", Small Firms Services Ltd". Sfsgo.com. Retrieved 31 July 2010. 
  26. ^ "CIC regulator". 
  27. ^ "How to Start a Charity in the UK", Capterra.
  28. ^ Charity Commissioners information page.
  29. ^ "Special rules for unrelated business income tax". U.S. Internal Revenue Service. Retrieved 19 August 2007. 
  30. ^ Audit Guide for Small Nonprofit Organizations http://www.vscpa.com/content/Visitors/Nonprofit_Resources/Audit_Guide.aspx
  31. ^ Edwards, M. and Hulme, D. (2002) NGO Performance and Accountability: Introduction and Overview. In: Edwards, M. and Hulme, D., ed. 2002. The Earthscan Reader on NGO Management. UK: Earthscan Publications Ltd., Chapter 11.
  32. ^ Brought to You by Wall Street, CORY MORNINGSTAR, CounterPunch, 2013.05.17
  33. ^ The Climate Wealth Opportunists, CORY MORNINGSTAR, CounterPunch, 2014.03.14
  34. ^ "Bill and Melinda Gates Foundation Annual Report 2007 - 2006 Combined Financial Statements". Gatesfoundation.org. Retrieved 31 July 2010. 
  35. ^ Hughes after Howard / D.Kenneth Richardson (2011) ISBN 978-0-9708050-8-9.
  36. ^ Frumkin, Peter (2005). On Being Nonprofit: A Conceptual Primer. Harvard University Press. 
  37. ^ :Glasius, Marlies, Mary Kaldor and Helmut Anheier (eds.) "Global Civil Society 2006/7". London: Sage, 2005.
  38. ^ Drayton, W: "Words Matter". Alliance Magazine, Vol. 12/No.2, June 2007.
  39. ^ Ramirez, Jr., L:"The Case for Social Benefit Organizations".MiniDonations.org Blog, February 2010.
  40. ^ Alvarado, Elliott I.: "Nonprofit or Not-for-profit -- Which Are You?", page 6-7. Nonprofit World, Volume 18, Number 6, November/December 2000.

Further reading

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