Nonprofit organization


Nonprofit organization

Nonprofit organization (abbreviated as NPO) is neither a legal or technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends. States in the United States defer to the IRS designation conferred under United States Internal Revenue Code Section 501(c), when the IRS deems an organization eligible. They may or may not have shareholders. [1]

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.[2] NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who work without compensation (or that work for a token fee, such as $10 per year).[3] 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 non-profit and an intent to make money are not related in the United States. This means nothing can be conferred by the declaration. It is unclear whether or not this holds outside of the U.S. In the United States, such inference is the purpose of the Internal Revenue Code, Section 501(c). The extent to which an NPO can generate surplus revenues may be constrained or use of surplus revenues may be restricted.

Contents

Nature and goals

Some NPOs may also be a charities or service organizations; 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.

Legal aspects

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. Nonprofits 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 Fairvote[4][5] and the National Organization for the Reform of Marijuana Laws.[6] The Model Nonprofit Corporation Act imposes many complexities and requirements on membership decision-making. Accordingly, many organizations , such as Wikimedia,[7] 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.[8][9] 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.[10]

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.[11]

Australia

In Australia, nonprofit organisations 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 organisation in question. As a legal entity, the organisation 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.[12]

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 that governing for-profit corporations, particularly as regards corporate governance. Federally 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 is expected to be proclaimed in the autumn or winter of 2011. 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, the new Act is expected to be proclaimed early during 2012.

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 charitable[13]

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

China

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.[14][15]

Finland

In Finland, "rekisteröity yhdistys", given the abbreviation ry, denotes a registered association. This is done at a cost of 75 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.

India

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

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

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.[16]

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.[17]

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 public good, even when managed for (limited) profit.[18]

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.[19] For example, a charity is generally not allowed to pay its Trustees. In England and Wales, charities may be registered with the Charity Commission.[20] 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 United States Charitable Organization.

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 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.[21] 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 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. A tax exempt organization's 990 forms are required to be made available for public scrutiny.

Belgium

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

  • Vereniging zonder winstoogmerk (Dutch, abbreviated vzw) or Association sans but lucratif (French, abbreviated asbl).
  • Internationale vereniging zonder winstoogmerk (Dutch, often abbreviated ivzw) or Association internationale sans but lucratif (French; often abbreviated aisbl) for international nonprofit organisations.
  • Stichting van openbaar nut (Dutch, abbreviated son) or Fondation d’utilités publique (French, abbreviated fup).

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

  • Feitelijke vereniging (Dutch language) or Association de fait (French language) an informal organization, often started for a short-term project, or managed alongside another NPO which does not have any status in law, so cannot purchase property etc.(association sans personnalité morale).

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]

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.[23]

Examples

In the United States, two of the wealthiest nonprofit organizations are the Bill and Melinda Gates Foundation, which has an endowment of $38 billion,[24] 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" 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, DEMIRA Deutsche Minenräumer (German Mine Clearers), FIDH International Federation for Human Rights, Goodwill Industries, United Way, The National Rifle Association, ACORN (now defunct), Habitat for Humanity, Family Promise, Teach For America, the Red Cross and Red Crescent organizations, UNESCO, IEEE, 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.

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

Internet

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 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 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.

Other terminology for the sector

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.[25] 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.[26] A more broadly-applicable term, "Social Benefit Organization" (SBO) has been advocated for by organizations such as MiniDonations.[27] 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.[28]

Education

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. ^ "Publication 4220 (Rev. 8-2009)" (PDF). http://www.irs.gov/pub/irs-pdf/p4220.pdf. Retrieved 31 July 2010. 
  3. ^ Drucker, Peter (1989). "What Business Can Learn from Nonprofits". Harvard Business Review: 1-7.
  4. ^ FairVote - Board of Directors.
  5. ^ FairVote - FAQs.
  6. ^ NORML Board of Directors - NORML.
  7. ^ "Bylaws". Wikimedia Foundation. 14 July 2010. http://wikimediafoundation.org/wiki/Wikimedia_Foundation_bylaws#ARTICLE_III_-_MEMBERSHIP. Retrieved 31 July 2010. 
  8. ^ 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 
  9. ^ Charity on Trial: What You Need to Know Before You Give / Doug White (2007) ISBN 1-56980-301-3.
  10. ^ SSRN-Voluntary Disclosure in Nonprofit Organizations: an Exploratory Study by Bruce Behn, Delwyn DeVries, Jing Lin.
  11. ^ "Applying for Exemption - Difference Between Nonprofit and Tax-Exempt Status". Irs.gov. http://www.irs.gov/charities/article/0,,id=136195,00.html. Retrieved 31 July 2010. 
  12. ^ "Legal structures of nonprofit organisations in Australia". Ourcommunity.com.au. http://www.ourcommunity.com.au/management/view_help_sheet.do?articleid=2099. Retrieved 30 January 2011. 
  13. ^ "Charities and Giving; What is Charitable". Canada Revenue Agency. http://www.cra-arc.gc.ca/chrts-gvng/chrts/pplyng/cpc/wtc-eng.html. Retrieved 28 June 2011. 
  14. ^ http://forum.hktdc.com/topic/2245/1/en/Non-profit-organisation-in-Hong-Kong.htm
  15. ^ http://www.hkicpa.org.hk/APLUS/0704/44.pdf
  16. ^ South African Charities.
  17. ^ ""Company Limited by Guarantee", Small Firms Services Ltd". Sfsgo.com. http://www.sfsgo.com/guaranteecompany.asp. Retrieved 31 July 2010. 
  18. ^ "CIC regulator". http://www.cicregulator.gov.uk/. 
  19. ^ "What is the Not For Profit Sector?", Charity People.
  20. ^ Charity Commissioners information page.
  21. ^ "Special rules for unrelated business income tax". U.S. Internal Revenue Service. http://www.irs.gov/charities/article/0,,id=96106,00.html. Retrieved 19 August 2007. 
  22. ^ Kamiya, Setsuko, "NPO tax status threatened by Diet split", Japan Times, 22 February 2011, p. 3.
  23. ^ Audit Guide for Small Nonprofit Organizations http://www.vscpa.com/content/Visitors/Nonprofit_Resources/Audit_Guide.aspx
  24. ^ "Bill and Melinda Gates Foundation Annual Report 2007 - 2006 Combined Financial Statements". Gatesfoundation.org. http://www.gatesfoundation.org/nr/public/media/annualreports/annualreport07/AR2007Statements.html. Retrieved 31 July 2010. 
  25. ^ :Glasius, Marlies, Mary Kaldor and Helmut Anheier (eds.) "Global Civil Society 2006/7". London: Sage, 2005.
  26. ^ Drayton, W: "Words Matter". Alliance Magazine, Vol. 12/No.2, June 2007.
  27. ^ Ramirez, Jr., L:"The Case for Social Benefit Organizations".MiniDonations.org Blog, February 2010.
  28. ^ 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

External links


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