What is a Not for Profit Organization?
A not-for-profit organization, as the word suggests, does not focus on earning profits. Instead, social welfare or charity remains its primary focus. Such organizations use all the money they earn to pursue their objectives and meet their operational costs. Moreover, such organizations do not distribute their profit to the owners. Instead, they use it to fulfill and further their objective.Read more: Not-for-profit Organization – Meaning, Types, and Features
Generally, such organizations don’t produce, buy or sell goods. Also, they have fewer credit transactions. Such organizations operate as charitable organizations. Thus, they don’t have to pay taxes on the profits and donations they get. Usually, these organizations work toward social causes in the field of education, religion, science, and research.
Features of Not-for-Profit Organization
Following are the features of a not-for-profit organization that makes them different from others:
- They do not aim to create wealth or profit but instead work towards the upliftment of a specific group of people or the community as a whole.
- These organizations work for a dedicated social objective.
- These organizations have members who are subscribers/endorsers of their cause.
- They depend on donations, subscriptions, and grants to manage their operations.
- Such organizations usually earn goodwill via their dedication and services.
- They do not have to pay taxes.
- They use some strategies and techniques like for-profit organizations. These strategies and techniques are accounting and management.
- Usually, a managing committee or executive committee manages such organizations. Members collectively elect these committees.
Though these organizations do not work to make a profit, they still need to keep track of their expenses, assets, income, liabilities, and more. And despite this being, not the objective such organizations do earn profits in the process. But they use these profits too to achieve their objectives. Such organizations, however, do not have to manage many accounts.
They do accounting to follow the law and track how money comes in and goes out. Also, good accounting helps these organizations show they’re responsible to their members, people who donate, and the government.
The funds collected by these organizations from various sources are credited to the general fund or capital fund. And, the surplus (if any) is also ultimately added to the capital fund. Because these organizations do not distribute the surplus usually.
Similar to other groups, these organizations must create financial statements at the end of each accounting period. These reports help them see how much money they earned and spent, and also understand their overall financial situation. Additionally, they have to submit these financial reports to the legal authorities. They also have to share these reports with people who currently support them and those who might want to support them in the future.
Types of Not-for-profit Organizations
There are primarily three types of not-for-profit organizations:
Social Advocacy Organizations
The objective of such organizations is to promote or lobby for a specific social or political cause. Such organizations can carry out fundraising programs to inform others about their objective, as well as encourage others to support their purpose. Also, these organizations use membership fees and donations from the general public and corporate to achieve their objective.
The objective of such organizations is to ensure the well-being of their members. The earning source for such organizations is the membership dues and fees from the members of such organizations. Some of the popular types of trade organizations are trade unions, chambers of commerce, etc.
Usually, rich people and corporate establish such organizations to support other non-profits, as well as promote social causes. Such organizations need to donate a certain percentage of their profit to retain their not-for-profit tag. In the U.S., such organizations are not allowed to support political activities. They can, however, donate to the organizations that work towards political lobbying.
Foundations can either be public or private. A public foundation is a charity organization that gets donations from many sources, including people, companies, and other foundations. Usually, such foundations directly work towards a social cause, such as providing homeless shelters. On the other hand, a private foundation is started by an individual, corporate, or family.
Other types of not-for-profit organizations are civil leagues, social welfare organizations, social and recreational clubs, employee beneficiary associations, local employee associations, fraternal societies, cemetery companies, veterans’ organizations, and more.
How to Start a Not-for-profit Organization?
Anyone for that matter can start such an organization. But, before starting or creating the founders must identify the need for their activity in the field of religion, science, or education. In other words, the cause they would like to serve by creating such an organization.
So, once someone spots a need that one can serve, the next step is to conduct in-depth research to get more information on the issue and how it needs to be addressed. The next step is to come up with a solid business plan. The plan should include the issue (or issues) that one wants to address and how he would like to address it.
The next task is to move ahead with the incorporation process. In the U.S., one also needs to file the 501(c)(4) tax-exempt status with the IRS. After completing these formalities only, one can execute their plans and process to serve the selected objective. Then, of course, all managerial activities need to be performed including hiring a team and putting them on the job.
How is it Different from For-Profit and Non-Profit Organizations?
For-profit organizations can take up any business activity they want. Also, these organizations can use the profit any way they want, including distributing it to the shareholders.
Not-for-profit organizations, on the other hand, are exclusively charity organizations that work towards their objective. The majority of such organizations depend on volunteers to meet their objectives as they do not have enough funds to hire permanent employees.
Non-profit organizations also do not distribute their profits to members, but they are different from not-for-profit in terms of usage of funds, size, and objective. Usually, non-profit organizations are more organized and focus on bigger objectives in the social, political, environmental, or economic fields. UNICEF is a good example of such an organization. Not-for-profit organizations, on the other hand, focus on achieving their objective within a society or community.