The Role of the Nonprofit
Read this section to learn about the roles and purposes of nonprofit organizations.
Nonprofits play a vital role in society by focusing their resources on providing services to community needs without regard to profit.
Key Takeaways
- While NPOs are permitted to generate surplus revenues, these revenues must be retained by the organization for its self-preservation, expansion, or plans.
- Some NPOs may also be charity or service organizations. They may be organized as corporations, trusts, or cooperatives; or they may exist informally.
- Both NPOs and for- profit corporate entities must have board members, steering committee members, or trustees who owe the organization a fiduciary duty of loyalty and trust.
- NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who work with or without compensation (occasionally nominal).
Key Terms
- Fiduciary: Related to trusts and trustees.
- Jurisdiction: The limits or territory within which authority may be exercised.
- Dividend: A pro rata payment of money by a company to its shareholders, usually made periodically (e.g., quarterly or annually).
Nonprofits Defined
A nonprofit organization (NPO) does not distribute profits or dividends. Instead, it retains any earnings or surplus revenues to achieve its goals. An organization is deemed eligible for nonprofit status under US Internal Revenue Code Section 501(c).
While nonprofit organizations are permitted to generate surplus revenues, these revenues must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or boards. Many have paid staff, including management, while others employ unpaid volunteers and even executives who work with or without compensation. Designation as a nonprofit and an intent to make money are not related in the United States. However, the extent to which an NPO can generate surplus revenues may be constrained, or the use of surplus revenues may be restricted.
Nonprofit Organizations: U.S. Navy Sailors, assigned to the aircraft carrier USS Ronald Reagan, position a frame of a wall while helping the nonprofit group Habitat for Humanity build homes.
Some NPOs may also be charitable or service organizations; they may be organized as a corporation, a trust, a cooperative, or they may exist informally. A very similar type of organization, called a supporting organization, operates like a foundation but is more complicated to administer, holds more favorable tax status, and is restricted in the public charities it can support. For legal classification, elements of importance include:
- 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
In the United States, nonprofit organizations are formed by filing bylaws and articles of incorporation in the state in which they expect to operate. In most jurisdictions, some of the above elements must be expressed in the charter of establishment. The act of incorporating creates a legal entity, which enables the organization to be treated as a corporation by law and to enter into business dealings, form contracts, and own property as any other individual or for-profit corporation may do. Most countries have laws that regulate the establishment and management of NPOs and require compliance with corporate governance regimes. Most larger organizations are required to publish financial reports detailing their income and expenditures publicly.
The two major types of nonprofit organizations are membership and board-only. A membership organization elects the board, meets regularly, and has 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 as "members".
In many countries, nonprofits may apply for tax-exempt status, so the organization itself can 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. After reviewing the application to ensure the organization meets the conditions (such as the purpose, limitations on spending, and internal safeguards for a charity), the IRS 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. Federal tax-exempt status does not guarantee exemption from state and local taxes, and vice versa.
The Role of Nonprofits in Society
Nonprofit organizations play a vital role in society by focusing their resources and providing services to community needs without regard to profit. Nonprofits aid in the development and upkeep of such sectors of society as the arts, economic development, cultural awareness, spirituality, veterans affairs, and health and wellness. In general, nonprofit organizations have strong ties to their local communities. Through these ties, nonprofits are able to accomplish local development and outreach.
Source: Lumen Learning, https://courses.lumenlearning.com/boundless-business/chapter/what-is-a-business/
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