Not For Profit (NFP) organizations are different from the For Profit (FP) organizations in several key ways.
First, a major source of funding for a NFP comes in the form of grants from foundations and through government at various levels. A grant is a special type of funding vehicle and has a number of unique requirements. Below is a general outline that we have prepared for our clients.
Second, the NFP is a special class of corporate structure from the routine business organization. It is a publicly held corporation created by the state for purposes the state demeans of value to the public and from which the public will benefit. In return for performing its services and functions, the not for profit is permitted to raise revenues for those specific purposes on a tax free basis. The board of directors are not the owners of the corporate assets, rather they are the trustees of the assets. The assets of the NFP belong to the public and can only be passed from one NFP to another.
Third, the NFP established at the state level is recognized by the United States government's Internal Revenue Service as a tax free organization under Sec. 501 (c)1 thru 27. Tax exemption may vary from complete exemption from taxes to partial exemption depending on the NFP's designation.
Fourth, the NFP is Mission driven rather than profit driven. This means the NFP's strategic goal is to achieve or promote a public good rather than to simply generate a financial profit for its owners. Here is where there is often confusion among those who work in the NFP sector. A NFP can and must be able to generate a surplus of revenue, that is earning exceeding expenses, if it is to survive. That surplus, in the For Profit organization, would be considered retained earning to be reinvested in the organization, and profit to be distributed to the owners. In the NFP there are retained earning just no profit category for the surplus.
Fifth, the unique nature, especially tax status, enables the NFP to pass on its tax benefits to those who donate money to it. The IRS allows the public to deduct from their income taxable income they donations that they make to recognized 501 (c) Not for Profit organizations. This creates a whole economy where funds can be donated to a public charity which in turn can donate its surplus to other NFP to actually carry of their mission.
So, if you are a NFP, or a planning to create one remember that the reason you exist is your Mission and you need to match your funding to your Mission and not the other way around. If you have any questions contact us directly or post a comment here.
Showing posts with label 501c3. Show all posts
Showing posts with label 501c3. Show all posts
Tuesday, August 25, 2009
Tuesday, July 21, 2009
Why are NFPs proactive externally and reactive internally?
The following is taken from a discussion I have had with Nick Nacov, on LinkedIn about the nature of Not For Profit (NFP) or NonProfit Organizations (NPO)
Nick began by asking the question:
Why are most non-profits very proactive regarding anything that could impact their core clients (however remote the chance) yet totally ignore internal issues such as financial management or their information/communication infrastructure (which could have a tremendous impact on their clients)?
An example of this could be an organization that wants to help abused women find a safe place to live. They will invoke lobbyists, mail/call campaigns and mobilize the masses to argue against any action that might have the slightest impact on their clients.
Yet they will ignore their own internal infrastructure, especially the financial side, until a problems arise (which can severely impact their clients).
I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business.
-----------------------
My response was:
"I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business"
Here is the problem. NFP's are not service driven. Service is the product of their actions. The energizing force is "Mission." They are mission driven --a mission in the religious sense -- where the goal is what counts.
Because they are mission driven they are flexible about the means for getting there -- that is, they trust that they will have the resources they need, and behave accordingly. This belief, or faith, may get them in trouble especially, financially. I've seen it frequently in my consulting.practice. But their commitment to their mission and clients often leads them to be resourceful and innovative in getting the job done.
Money is not the focus or purpose of true nonprofits. It is what money can buy that is important and that is people and materials. People can be recruited as volunteers and material can be donated in lieu of money.
In fact, many nonprofits are better at getting the job done than the for profit sector. They don't have to worry about share holders.
------------------------------
Then Nick came back with this interesting observation.
I didn't consider the mission angle, which could explain some of this. I will admit that many of our clients are good at doing more with less,
I have though seen similar zeal at huge NPOs (ex American Chemical Society, NRA) as those struggling to get their first million.
Where I see a difference is that these large NPOs understand that the mission of the organization is just as well served by those internal to the group as the external facing contacts.
The ones facing failure are usually the ones where management views internal staff as necessary evil (ex to placate the board) and treats them as secondary citizens.
-------------------
My response is
You do raise a good point. I would look to what size does to good intentions. The Red Cross and other major charities have had their problems in part do to their size.
I agree about the large or Mega Non-profits. They are not much different than the mega for profit enterprise. Size, or scale, impacts the way an organization is governed and managed. But again it is unfair to apply private business management criteria to the way nonprofits are managed. The legal structures for the two are different.
I find that the culture of the non-profit is the determining factor. When someone with an MBA goes into a nonprofit as a manager the logic she has been trained in is changed by the philosophy and type of clients and co-workers who have values that do not know or care about ROI.
Also there are multiple types of NFPs. The NRA is a membership organization and a political lobbying group a 501c4 and not a 501c3 which most NPOs are.
501(c)(4)
A 501(c)(4) exemptions are given to civic leagues and other organizations operated exclusively for the promotion of social welfare, or local associations of employees the membership of which is limited to a designated company or persons in a particular municipality or neighborhood and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.Characteristics that set these organizations apart from 501(c)(3) organizations include an unlimited ability to lobby for legislation and the ability to participate in political campaigns and elections.
While 501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
As for the American Chemical Society see:http://en.wikipedia.org/wiki/American_Chemical_Society.
-------------------------
To which I would add:
These are the exceptions that prove the rule, I believe. Most non-profits are mission driven and therefore never grow to the size of an NRA,AMC or Red Cross. Those that do are forced to act more like for-profit firms and take on managers with a for-profit mind set. This can lead to conflict if the boards of directors fail to understand the fundamental cultural differences between NFP and FP organizations
Nick began by asking the question:
Why are most non-profits very proactive regarding anything that could impact their core clients (however remote the chance) yet totally ignore internal issues such as financial management or their information/communication infrastructure (which could have a tremendous impact on their clients)?
An example of this could be an organization that wants to help abused women find a safe place to live. They will invoke lobbyists, mail/call campaigns and mobilize the masses to argue against any action that might have the slightest impact on their clients.
Yet they will ignore their own internal infrastructure, especially the financial side, until a problems arise (which can severely impact their clients).
I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business.
-----------------------
My response was:
"I know that NFPs are service oriented industries but you can’t serve anyone when you yourself are out of business"
Here is the problem. NFP's are not service driven. Service is the product of their actions. The energizing force is "Mission." They are mission driven --a mission in the religious sense -- where the goal is what counts.
Because they are mission driven they are flexible about the means for getting there -- that is, they trust that they will have the resources they need, and behave accordingly. This belief, or faith, may get them in trouble especially, financially. I've seen it frequently in my consulting.practice. But their commitment to their mission and clients often leads them to be resourceful and innovative in getting the job done.
Money is not the focus or purpose of true nonprofits. It is what money can buy that is important and that is people and materials. People can be recruited as volunteers and material can be donated in lieu of money.
In fact, many nonprofits are better at getting the job done than the for profit sector. They don't have to worry about share holders.
------------------------------
Then Nick came back with this interesting observation.
I didn't consider the mission angle, which could explain some of this. I will admit that many of our clients are good at doing more with less,
I have though seen similar zeal at huge NPOs (ex American Chemical Society, NRA) as those struggling to get their first million.
Where I see a difference is that these large NPOs understand that the mission of the organization is just as well served by those internal to the group as the external facing contacts.
The ones facing failure are usually the ones where management views internal staff as necessary evil (ex to placate the board) and treats them as secondary citizens.
-------------------
My response is
You do raise a good point. I would look to what size does to good intentions. The Red Cross and other major charities have had their problems in part do to their size.
I agree about the large or Mega Non-profits. They are not much different than the mega for profit enterprise. Size, or scale, impacts the way an organization is governed and managed. But again it is unfair to apply private business management criteria to the way nonprofits are managed. The legal structures for the two are different.
I find that the culture of the non-profit is the determining factor. When someone with an MBA goes into a nonprofit as a manager the logic she has been trained in is changed by the philosophy and type of clients and co-workers who have values that do not know or care about ROI.
Also there are multiple types of NFPs. The NRA is a membership organization and a political lobbying group a 501c4 and not a 501c3 which most NPOs are.
501(c)(4)
A 501(c)(4) exemptions are given to civic leagues and other organizations operated exclusively for the promotion of social welfare, or local associations of employees the membership of which is limited to a designated company or persons in a particular municipality or neighborhood and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.Characteristics that set these organizations apart from 501(c)(3) organizations include an unlimited ability to lobby for legislation and the ability to participate in political campaigns and elections.
While 501(c)(3) exemptions apply to corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational purposes, to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
As for the American Chemical Society see:http://en.wikipedia.org/wiki/American_Chemical_Society.
-------------------------
To which I would add:
These are the exceptions that prove the rule, I believe. Most non-profits are mission driven and therefore never grow to the size of an NRA,AMC or Red Cross. Those that do are forced to act more like for-profit firms and take on managers with a for-profit mind set. This can lead to conflict if the boards of directors fail to understand the fundamental cultural differences between NFP and FP organizations
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