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Non-profit distinction

Whereas for-profit corporations exist to earn and distribute taxable business earnings to shareholders, the nonprofit corporation exists solely to provide programs and services that are of public benefit. Often these programs and services are not otherwise provided by local, state, or federal entities. While they are able to earn a profit, more accurately called a surplus, such earnings must be retained by the organization for its future provision of programs and services. Earnings may not benefit individuals or stake-holders. Nonprofit organizations may put substantial funds into hiring leadership and management personnel. In the past, many nonprofits considered this to be unreasonably businesslike and money-focused, but since the late 1980s there has been a growing consensus that nonprofits can achieve their missions more effectively by using some of the same methods developed in for-profit enterprises. These include effective internal management, ensuring accountability for results, and monitoring the performance of different divisions or projects in order to make the best use of their funds and people. Those require management and that, in turn, begins with the organization's mission.

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.

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:

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, including church members, though most churches remain fiscally transparent with their members.

Formation and structure

In the United States of America, nonprofit organizations are 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 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. 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 and the National Organization for the Reform of Marijuana Laws. 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 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. 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.

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.

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 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.

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.''

Canada

In Canada, NPOs may be formed at either the federal or provincial levels. Charities must generally be registered with the Canada Revenue Agency and may issue tax receipts for donations.

India

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

They can be registered in four ways, viz.
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 .

United Kingdom

In the UK, many non-profit companies are incorporated as a company limited by guarantee. This means that the company doesn't 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.

Alternatively, non-profit companies may be formed as a Community Interest Company. This is in many ways similar to a Limited Liability Company, but is intended specifically to ensure that the profits and assets of the company are used for public good.

A charity is a non-profit organisation that meets stricter criteria regarding its purpose and the way in which it makes decisions and reports its finances.. For example, a charity is generally not allowed to pay its Trustees. In England and Wales, charities may 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 elsewhere, 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.
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

In the United States, two of the wealthiest non-profit organizations are the Bill and Melinda Gates Foundation, which has an endowment of $38 billion, 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
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, Teach For America, 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 and Literacy Center West) to people throughout the world. There are more than 1.6 million NPOs in the United States alone.

On the 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 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. 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.