A nonprofit organization, also known as a non-business entity, is an organization that has been formed by a group of people in order "to pursue a common not-for-profit goal", that is, to pursue a stated goal without the intention of distributing excess revenue to members or leaders. A nonprofit organization is often dedicated to furthering a particular social cause or advocating for a particular point of view. In economic terms, a nonprofit organization uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus income to the organization's shareholders (or equivalents) as profit or dividends. This is known as the non-distribution constraint. The decision to adopt a nonprofit legal structure is one that will often have taxation implications, particularly where the nonprofit seeks income tax exemption or charitable status.
Terminology and variations
The terms nonprofit and not-for-profit are not consistently differentiated across jurisdictions. In layman's terms, they are usually equivalent in concept, although in various jurisdictions there are accounting and legal differences.
NPOs are like a foundation, but they are more complicated to administer, hold more favorable tax status and are restricted in the public charities they support. Their goal is not to be successful in terms of wealth, but in terms of giving value to the groups of people they serve.
The nonprofit landscape is highly varied, although many people have come to associate NPOs with charitable organizations. Although charities do make up an often high-profile or visible aspect of the sector, there are many other types of nonprofit organizations. Overall, they tend to be either member-serving or community-serving. Member-serving organizations include mutual societies, cooperatives, trade unions, credit unions, industry associations, sports clubs, retired serviceman's clubs and advocacy groups or peak bodies – organizations that benefit a particular group of people, i.e. the members of the organization. Typically, community-serving organizations are focused on providing services to the community in general, either globally or locally: organizations delivering human services programs or projects, aid and development programs, medical research, education, health services, and so on. It could be argued that many nonprofits sit across both camps, at least in terms of the impact they make. For example, the grassroots support group that provides a lifeline to those with a particular condition or disease could be deemed to be serving its members (by directly supporting them) and the broader community (through the provision of a service for fellow citizens).
Although NPOs are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or a board of directors. Many have paid staff including management, whereas others employ unpaid volunteers and executives who work with or without compensation (occasionally nominal). In some countries, 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 does not mean that the organization does not intend to make a profit, but rather that the organization has no 'owners' and that the funds realized in the operation of the organization will not be used to benefit any owners. The extent to which an NPO can generate surplus revenues may be constrained or use of surplus revenues may be restricted.
A voluntary group or union (also sometimes called a voluntary organization, common-interest association,:266 association, or society) is a group of individuals who enter into an agreement, usually as volunteers, to form a body (or organization) to accomplish a purpose. Common examples include trade associations, trade unions, learned societies, professional associations, and environmental groups.
Membership is not necessarily voluntary: in order for particular associations to function correctly they might need to be mandatory or at least strongly encouraged, as is common with many teachers unions in the US. Because of this, some people use the term common-interest association to describe groups which form out of a common interest, although this term is not widely used or understood.
Voluntary associations may be incorporated or unincorporated; for example, in the US, unions gained additional powers by incorporating. In the UK, the terms Voluntary Association or Voluntary Organisation cover every type of group from a small local Residents' Association to large Associations (often Registered Charities) with multimillion-pound turnover that run large-scale business operations (often providing some kind of public service as subcontractors to government departments or local authorities).
This page was last updated July 6th, 2018 by kim
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