Non-profit organization

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A non-profit organization (abbreviated "NPO", also "non-profit" or "not-for-profit") is a legally constituted organization whose primary objective is to support or to actively engage in activities of public or private interest without any commercial or monetary profit purposes. NPOs are active in a wide range of areas, including the environment, humanitarian aid, animal protection, education, the arts, social issues, charities, early childhood education, health care, politics, religion, research, sports or other endeavors.

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[edit] For-profit distinction

Most experts consider the legal and ethical restrictions on the distribution of profits to owners or shareholders as what fundamentally distinguishes NPOs from commercial enterprises. The use of the term "not-for-profit" rather than "non-profit" has been debated within the field. While there are definitive preferences for one term or the other, there is no broad consensus. [1]

NPOs generally do not operate to generate profit, a characteristic widely considered to be defining of such organizations. However, an NPO may accept, hold and disburse money and other things of value. It may also legally and ethically trade at a profit. The extent to which it can generate income may be constrained, or the use of those profits may be restricted. NPOs therefore are typically funded by donations from the private or public sector, and often have tax exempt status. Donations may sometimes be tax deductible.

"Non-profits" are operated by either volunteers or paid positions. Recently, some paid positions have come under question as the salaries of top level executives were in the millions of dollars per year.[citation needed] Additionally, an NPO may have members or participants or beneficiaries or students etc. as opposed to customers in a for-profit organization. One should not generalize about the comparative cost of a "non-profit" versus "for profit" organization; there may be a lot of internalized profit in a non-profit organization.

[edit] Nature and goals

NPOs often are 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.

Most 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.[citation needed]

[edit] Legal aspects

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.

[edit] Formation and structure

In the United States, 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.

[edit] 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.

Only limited types of tax exempt, non-profit organizations offer to donors the advantage of deductions for the amount donated.

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

In the 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.[2] Failure to maintain operations in conformity to the laws may result in an organization losing its tax exempt status.

Also in the United States, 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.

[edit] Religious entities in the U.S.

In the United States, the First Amendment protects religions from federal law freedom of religion, religious non-profit entities like churches are exempt from federal taxes only if they apply for a 501(c)(3) exemption and agree to certain conditions.[3] Depending on the state in which they are located, they may be exempt from some of the inspections or regulations governing non-religious groups performing the same services.[4] Religious organizations usually take the form of a religious corporation.

[edit] Canada

In Canada, NPOs which take the form of charities must generally be registered with the Canada Revenue Agency.

[edit] United Kingdom

In England and Wales, NPOs which take the form of charities must generally 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.

[edit] 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.

[edit] Examples

The largest NPO in the United States (and the world) is 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). The second largest is the Howard Hughes Medical Institute, which has an endowment of approximately $14.8 billion. Elsewhere in the world, the largest NPO is probably the British Wellcome Trust, which is a "charity" in British usage. Note that this assessment excludes universities, at least a few of which have assets in the tens of billions of dollars.

Of course measuring a 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 or the arts to people throughout the world. There are more than 1.6 million NPOs in the United States alone. For more see Wikipedia articles on non-profit organizations

[edit] 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.

[edit] 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.[5] 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. [6] This labels and positions the sector as its own entity, without relying on language used for the government or business sectors.

[edit] See also

[edit] Laws

[edit] References

  1. ^ Alvarado, Elliott I.: "Nonprofit or Not-for-profit -- Which Are You?", page 6-7. Nonprofit World, Volume 18, Number 6, November/December 2000; see also The Nonprofit FAQ. Action Without Borders. Retrieved on 2007-08-30.
  2. ^ Special rules for unrelated business income tax. U.S. Internal Revenue Service. Retrieved on 2007-08-19.
  3. ^ Tax information for churches and religious organizations. U.S. Internal Revenue Service. Retrieved on 2007-08-18.
  4. ^ Henriques, Diana B.. "Religion Trumps Regulation As Legal Exemptions Grow", NY Times, 8 October 2006, pp. A1. 
  5. ^ :Glasius, Marlies, Mary Kaldor and Helmut Anheier (eds.) "Global Civil Society 2006/7". London: Sage, 2005.
  6. ^ Drayton, W: "Words Matter". Alliance Magazine, Vol. 12/No.2, June 2007

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