Nonprofit organizations do a lot of good, both here in the United States and abroad. These entities help the homeless, provide relief for those impacted by humanitarian or natural disasters, work to combat discrimination in communities, and more. They are an everyday part of life for many people, but what exactly is a nonprofit organization and how does it work? This short primer will help anyone interested in learning more about these organizations.
Definition and Purpose
A nonprofit organization, also known as an NPO, is a non-business entity that is tax-exempt by law in the United States and operates in a variety of settings. The main purpose of an NPO is to further social, humanitarian, environmental or other causes as stated in the organization’s mission statement. The organization’s money is donated by individuals and used for the purposes of furthering its mission statement. Nonprofit organizations are accountable to the government, donors, volunteers, and members of the public. They may work in the United States or abroad and must follow the laws of the countries they operate in, as well as international law if it applies.
Difference Between Nongovernmental Organizations and Nonprofit Organizations
Many people confuse the term “nonprofit organization” and “nongovernmental organization,” but they are not interchangeable. Carnegie Mellon University states that nongovernmental organizations, or NGOs, may receive funding from a government but operate without oversight or representation from that government. They most often work nationally or internationally and pay their employees and fund projects with the money provided to them by the government. NPOs, on the other hand, are regulated by law, offer services in concert with local, state, and federal entities, and earn money through donations, which they can then use to pay employees. NPOs generally work locally as well, meaning that they do not have as far of a reach as NGOs.
How Nonprofit Organizations Work
Nonprofit organizations work by generating donations; this can come from the public, be offered by corporations or other businesses, sales of merchandise, and more. The money generated from their fundraising efforts helps to pay employees and for the programs that they wish to fund. Nonprofits must report all of the donations they receive and some organizations will be tax-exempt by earning 501(c)(3) status, which is a United States government designation that requires a full review of the NPO. The money then leftover is used for programs, which are generally transparent in management and finances to ensure the public understands exactly what their money is being used for.
A New Financing Model
Fundraising takes up a large portion of any nonprofit organization’s time; without the money raised by individuals or groups, the NPO will not be able to function. However, there is a new model that is being floated out in the community and aims to build a security net for donors who offer large amounts of money. The New York Times has reported on the model, which is being lauded by several businessmen, including Richard Branson. It works by creating what is called a “donor fund,” which is money offered by several donors. A group of investors, not donors, then buy performance-based bonds. The money raised by the bonds will then finance the nonprofit’s programs. If all goes well, the NPO will perform as or better than expected and the donor fund will be used to pay investors. However, NPOs must adhere to performance-based reviews, meaning that if an organization does not perform as well as expected, investors will lose their money and the money in the donor fund will be returned to the donors. While this may seem like a good way to ensure NPOs stay focused on their goals, there is controversy surrounding this model, which has yet to be deployed throughout the sector.
Nonprofit organizations are critical to the public and marginalized communities. These organizations often provide services and aid that the government cannot with the goal of helping every individual and family that needs it. While it may be confusing to pin down the definition of a nonprofit organization, understanding its role and function in society will help everyone understand just how important they are to everyday life.