Nonprofit organization

According to the National Center for Charitable Statistics (NCCS), there are more than 1.5 million nonprofit organizations registered in the United States, including public charities, private foundations, and other nonprofit organizations. Private charitable contributions increased for the fourth consecutive year in 2017 (since 2014), at an estimated $410.02 billion. Out of these contributions, religious organizations received 30.9%, education organizations received 14.3%, and human services organizations received 12.1%.[4] Between September 2010 and September 2014, approximately 25.3% of Americans over the age of 16 volunteered for a nonprofit.[5]

Nonprofit and not-for-profit are terms that are used similarly, but do not mean the same thing. Nonprofit organizations typically operate at a loss and rely heavily on donors to continue operations. Not-for-profits operate at small margins of 3-4% and use the proceeds from those margins to reinvest in the company. [6]

In the United States, both nonprofits and not-for-profits are tax-exempt under IRS publication 557. Although they are both tax-exempt, each organization faces different tax code requirements. A nonprofit is tax-exempt under 501(c)(3) requirements if it is either a religious, charitable, or educational based organization that does not influence state and federal legislation. Not-for-profits are tax-exempt under 501(c)(7) requirements if they are an organization for pleasure, recreation, or another nonprofit purpose.[6] A news report of 2022[7] quotes a chief executive of a large health system in the United States as having explained to "an industry publication in 2021 that “‘nonprofit health care’ is a misnomer. It is tax-exempt health care,” he said. “It still makes profits.” Those profits, he added, support the hospital's mission."[7]

Nonprofits are either member-serving or community-serving. Member-serving nonprofit organizations create a benefit for the members of their organization and can include but are not limited to credit unions, sports clubs, and advocacy groups. Community-serving nonprofit organizations focus on providing services to the community either globally or locally. Community-serving nonprofits include organizations that deliver aid and development programs, medical research, education, and health services. It is possible for a nonprofit to be both member-serving and community-serving.

In the United States, nonprofit organizations are formed by filing bylaws or articles of incorporation or both in the state in which they expect to operate. The act of incorporation creates a legal entity enabling the organization to be treated as a distinct body (corporation) by law and to enter into business dealings, form contracts, and own property as individuals or for-profit corporations can.

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 the 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 or service recipients as 'members'; examples of such organizations are FairVote[15][16] and the National Organization for the Reform of Marijuana Laws.[17] The Model Nonprofit Corporation Act imposes many complexities and requirements on membership decision-making.[18] Accordingly, many organizations, such as the Wikimedia Foundation,[19] 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 the election of the board, there are few inherent safeguards against abuse.[20][21] 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.[22] A further rebuttal might be that NPOs are constrained, by their choice of legal structure, from financial benefit as far as distribution of profit to members and directors is concerned.

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 in the Internal Revenue Code (IRC). Granting nonprofit status is done by the state, while granting tax-exempt designation (such as IRC 501(c)) is granted by the federal government via the IRS. This means that not all nonprofits are eligible to be tax-exempt.[23] For example, employees of non-profit organizations pay taxes from their salaries, which they receive according to the laws of the country. NPOs use the model of a double bottom line in that furthering their cause is more important than making a profit, though both are needed to ensure the organization's sustainability.[24][25] An advantage of non-profit organisations registered in the UK is that they benefit from some reliefs and exemptions. Charities and non-profits are exempt from Corporation Tax as well as the trustees being exempt from Income Tax. [26]

In the U.S., "social welfare" nonprofits (IRS Section 501(c)(4)) are frequently used by politicians. Their use has resulted in controversies for politicians such as Kwame Kilpatrick and Gretchen Whitmer.[27]

Founder's syndrome is an issue organizations experience as they expand. Dynamic founders, who have 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.[28]

Resource mismanagement is a particular problem with NPOs because the employees are not accountable to anyone who has 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.[29] Some commenters have argued that the receipt of significant funding from large for-profit corporations can ultimately alter the NPO's functions.[30] A frequent measure of an NPO's efficiency is its expense ratio (i.e. expenditures on things other than its programs, divided by its total expenditures).

Competition for employees with the public and private sector is another problem that nonprofit organizations inevitably face, particularly for management positions. There are reports of major talent shortages in the nonprofit sector today regarding newly graduated workers,[31] and NPOs have for too long relegated hiring to a secondary priority,[32] which could be why they find themselves in the position many do. While many established NPOs are well-funded and comparative to their public sector competitors, many more are independent and must be creative with which incentives they use to attract and maintain vibrant personalities. The initial interest for many is the remuneration package, though many who have been questioned after leaving an NPO have reported that it was stressful work environments and implacable work that drove them away.[33]

Public- and private-sector employment have, for the most part, been able to offer more to their employees than most nonprofit agencies throughout history. Either in the form of higher wages, more comprehensive benefit packages, or less tedious work, the public and private sectors have enjoyed an advantage over NPOs in attracting employees. Traditionally, the NPO has attracted mission-driven individuals who want to assist their chosen cause. Compounding the issue is that some NPOs do not operate in a manner similar to most businesses, or only seasonally. This leads many young and driven employees to forego NPOs in favor of more stable employment. Today, however, nonprofit organizations are adopting methods used by their competitors and finding new means to retain their employees and attract the best of the newly minted workforce.[34]

It has been mentioned that most nonprofits will never be able to match the pay of the private sector[35] and therefore should focus their attention on benefits packages, incentives and implementing pleasurable work environments. A good environment is ranked higher than salary and pressure of work.[32] NPOs are encouraged to pay as much as they are able and offer a low-stress work environment that the employee can associate him or herself positively with. Other incentives that should be implemented are generous vacation allowances or flexible work hours.[36]