What are Nonprofit Organizations?

Published by Thomas Herold in Economics, Laws & Regulations

'Nonprofit Organizations' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Nonprofit Organizations represent entities whose reason for being is to provide help or value to members or the community at large. These are also called not for profit organizations as well as non-business entities. There are many reasons why an agency would incorporate as a not for profit. They are often interested in promoting points of view or social and charitable causes. Such outfits utilize excess revenues they obtain in order to promote their mission and purpose. They do not ever distribute the so-called profits to stakeholders in the form of dividend payouts. This unique feature of nonprofits is called the non-distribution limitation.

When entities elect to become a Nonprofit Organization, there will typically be tax status ramifications involved. This is the case as not for profits generally seek out tax exemption because of their charitable or socially oriented nature. It is important to note that not all NPOs are charitable organizations, even though many individuals equate the two types of organizations. It is true that charities comprise the most visible component of the category, yet many other kinds of nonprofit organizations also exist.

Founders typically design other kinds of not for profits to serve their communities or members. Among the ones which serve their communities are organizations that concentrate on delivering services to the general community on a local, national, or global scale. These could be those that provide human development and aid, human service projects and programs, health and education services, medical research benefits, and others.

Member serving nonprofit organizations include such entities as cooperatives, mutual societies, credit and trade unions, industry associations, retired servicemen’s clubs, sports clubs, and advocacy or lobby groups. All of these kinds of not for profit organizations actually benefit a certain group of individuals.

With many nonprofits, they are both member-serving and community-serving at the same time. Any grassroots-based support group for cancer victims would be such an example. It serves its members who have cancer by supporting them directly. It also benefits the community at large by providing much needed services to citizens who are also members of the general public.

Though the nonprofit organizations are allowed to create additional revenues beyond their expenses, they have to keep such profit surpluses and use them for ongoing future operations, plans, or expansion efforts. They can not distribute them to any board member or director, organization participant, or beneficiary of the group.

Not for profits have one thing in common with their for profit cousins. They both have boards of directors which exercise control over their respective organizations. Both will also typically have management and other staff which receive compensation for their efforts. Some NPOs utilize executives and volunteers who are not paid or who work for a token compensation. There are jurisdictions and nations that require a nominal fee be paid to directors and managers so that they can form a legally binding contract between organization and executive or board member.

It is interesting to remember that because an organization receives the nonprofit designation, this does not signify that it will not try to turn profits. Instead it means that the entity will not have any owners who benefit from the revenues and/or profits earned. In many cases, the amounts of surplus revenues that NPOs are able to generate, keep, and even deploy are restricted by government laws and regulations within their jurisdictions.

While many nonprofit organizations are service or charitably inclined, others organize and function like a trust or a cooperative. Supporting organizations are much like NPOs. They work as a foundation yet are more complex in their administration requirements. These supporting organizations also obtain a more advantageous tax treatment and commit to restrictions on the various public charities which they support. Such an organization’s goals are not to amass wealth, but instead are to provide help for and meaning to the peoples they support.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Nonprofit Organizations' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.