Definition
A Not-For-Profit Organization is a type of entity that does not distribute its surplus funds to owners or shareholders, but instead reinvests them back into the organization to further achieve its mission or purpose. These organizations primarily rely on fundraised money, public and private grants, or donations for funding. Examples include charitable organizations, universities, and certain healthcare facilities.
Key Takeaways
- A Not-For-Profit Organization (NFP) is a type of organization that has the primary objective of providing goods, services, or causes for the community, rather than pursuing profits or return on investment. They focus on societal, educational, charitable, religious or other activities serving the public interest.
- NFPs enjoy some form of tax exemption, as they are not operating for profit distribution to shareholders or owners. Instead, any incomes or donations are reinvested back into their mission to further expand on their cause and improve their services.
- NFPs can generate revenue but it is redirected back into the organization’s purpose and mission, rather than distributed to shareholders or directors. This revenue can be raised from membership dues, fundraising, grants, and sales of goods and services. The transparency and accounting of these funds are essential for maintaining their not-for-profit status.
Importance
A Not-For-Profit Organization is an important term in finance because these types of organizations significantly contribute to the economy and society by providing vital services that may not be adequately provided by the private sector.
They operate on the principle of disbursing all their generated income (obtained through fundraising, donations, or grant) towards pursuing their goals and objectives rather than distributing it as profit or dividends to their owners or shareholders.
Hence, understanding this term is essential for comprehending fiscal flows, taxation laws, the social benefit sector, the principle of surplus allocation, and the economic impact of such organizations.
An in-depth understanding of Not-for-profit organizations enables better strategic decision-making, policy formulation, and effective management of resources in these sectors.
Explanation
Not-for-Profit organizations are distinct entities that are designed to serve the public interest without the primary goal of making profit. The overarching purpose of these types of organizations is to provide social, educational, charitable, religious, or other services to part of a community or the greater societal good.
These organizations might operate in various sectors such as healthcare, community development, poverty alleviation, education, science, culture, or the arts. They rely heavily on donations, grants, and membership fees for their finances.
The functioning of a not-for-profit organization is for the benefit of the community as a whole, rather than the individuals who run or manage it. Even though these organizations are not focused on revenue generation, they may indeed generate profits, but any profits made are reinvested back into the organization to help meet its mission.
They may use these funds for staff wages, operational expenses, expansion of services, or programming development. It’s important to note that not-for-profit organizations have a unique, tax-exempt status determined by the government, based on their service to public welfare.
Examples of Not-For-Profit Organization
American Red Cross: A well-known not-for-profit organization that provides emergency assistance and disaster relief in the U.S. They rely on donations from the public, revenue from blood products, and grants from government agencies.
World Wildlife Fund (WWF): WWF is a renowned not-for-profit organization with the mission of conservation of nature. They achieve their goals through a wide variety of initiatives, funded by donations and grants.
United Nations Children’s Fund (UNICEF): UNICEF is a global not-for-profit organization that works in over 190 countries and territories to save children’s lives, to defend their rights, and to help them fulfill their potential. It is funded through voluntary contributions from individual donors, corporations, governments, intergovernmental organizations, and fundraisers.
FAQs for Not-For-Profit Organization
What is a Not-For-Profit Organization?
A Not-For-Profit Organization is a type of organization that does not earn profits for its owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization’s objectives and keeping it running. The primary goal of such an organization is not to make profit but to serve the society.
How does a Not-For-Profit Organization work?
A Not-For-Profit Organization works by utilizing its funds or revenues to achieve a specific purpose, which is usually a matter of public concern. They generate funds through donations, grants, and fundraising initiatives.
What are some examples of Not-For-Profit Organizations?
Examples of not-for-profit organizations include churches, public schools, public charities, public clinics and hospitals, political organizations, legal aid societies, volunteer services organizations, labor unions, professional associations, research institutes, museums, and some governmental agencies.
What is the difference between a Not-For-Profit and a Nonprofit Organization?
The difference between Not-For-Profit Organizations and Nonprofit Organizations mainly lies in scope and structure. Not-For-Profit is a type of activity that does not earn a profit, for instance, a hobby. Meanwhile, Nonprofit is an entity structure that exists to provide a benefit to the public.
How to start a Not-For-Profit Organization?
To start a Not-For-Profit Organization, one must first identify a unique goal or purpose, then incorporate the organization at a state level, apply for an Employer Identification Number (EIN), and then file for tax-exempt status with the Internal Revenue Service (IRS). State and local regulations may also apply.
Related Entrepreneurship Terms
- Charitable Contributions
- Non-profit Tax Exemptions
- Philanthropy
- Fundraising
- Non-profit Board of Directors
Sources for More Information
- Internal Revenue Service (IRS): The U.S. government agency responsible for tax collection and tax law enforcement. It provides detailed information on the requirements for Not-for-Profit organizations.
- Investopedia: This site has learning resources and tools to empower individuals to make complex financial decisions, including articles about Not-for-Profit organizations.
- AccountingTools: This website is a useful resource for financial professionals, providing a comprehensive description of Not-for-Profit organizations accounting standards and policies.
- National Council of Nonprofits: They provide resources designed to help community-oriented nonprofits grow stronger by understanding their legal and operational status as not-for-profit organizations.
