A
nonprofit organization (US and UK),
[1] or
not-for-profit organization (UK and others), often called an
NPO or simply a
nonprofit, also
non-commercial organization (Russia and
CIS) often called an
NCO, is 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.
[2]
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 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.
Nature 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.
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. 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
Fairvote[5][6] and the
National Organization for the Reform of Marijuana Laws.
[7] The
Model Nonprofit Corporation Act imposes many complexities and requirements on membership decision-making.
[citation needed] Accordingly, many organizations, such as
Wikimedia,
[8] 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.
[9][10] 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.
[11]
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.
[12]
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.
[13]
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 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[14]
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.
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.
[15][16]
India
In
India, NPOs are known commonly as Non-Governmental Organizations (NGOs).
[17]
They can be registered in four ways:
- Trust
- Society
- Section-25 Company
- 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.
[18]
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.
[19]
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.
[20] 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.
[21]
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.
[22]
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.
[23][dead link] For example, a charity is generally not allowed to pay its Trustees. In
England and Wales, charities may be registered with the
Charity Commission.
[24] 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 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.
[25] 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.
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.
[26]
Definition