What is a Nonprofit Organization?

Written by Dave Lavinsky

what is a nonprofit

Nonprofit organizations are run by a group of people who have a common goal and want to work together. The word “nonprofit” means that the organization does not make a profit from its activities. Any money made goes back into the project or service they provide, or into putting on future events.

A nonprofit organization does not distribute its income to owners or shareholders (except tax-deductible donations) and uses surplus revenue to achieve its goals rather than distributing it as profit or dividends. A charitable organization uses the surplus to further its cause (e.g., provide aid to the poor, provide scholarships for students).

Nonprofit organizations can take many different forms depending on which country they are set up in and how they choose to operate. They can be anything from large multinational charities such as Oxfam or Amnesty International to smaller local charities, like your local volunteer fire department or an animal shelter.


What Makes a Nonprofit Organization Unique?

A nonprofit organization has very different implications for its founders than a traditional business. This is because there are many restrictions on the use of donations and the distribution of assets to directors or members if it should dissolve. Nonprofit organizations are registered for tax purposes as separate legal entities, so this means that all assets of the organization are not legally owned by its founders. Rather, these assets belong to the organization itself and are controlled by members or directors on behalf of the organization.


Why Would I Form a Nonprofit Organization?

Nonprofit organizations are formed for many reasons. A few examples of their purposes are:

  • To create a service, agency, facility, or program that would not otherwise exist in the community.
  • To join together to achieve common goals that are beyond the scope of individuals acting alone.
  • To pool resources and share expensive resources, such as equipment or property.
  • To provide education for people in an area of specialization.
  • To create awareness about a social issue or concern (e.g., recycling).
  • To provide a sense of community or belonging for people in an area.


How Do I Form a Nonprofit Organization? 

Forming your own nonprofit organization is not that difficult. However, you must follow various rules and laws depending on where you choose to form the organization (for example, in the US it must be based in a certain state). There are several types of nonprofit organizations, and to name a few:

A charitable organization is similar to other nonprofits in that it does not distribute its income as profit. But unlike other nonprofits, a charitable organization can accept donations from public and private corporations. These donations are tax-deductible to the donor. Charities have an educational or religious purpose and there must be a board of directors to control and manage the organization.

A membership organization is set up for the benefit of its members, who need to pay an annual fee to join. The main purpose of such organizations is to provide benefits or services that cannot be achieved by individual members acting alone.

An unincorporated association can be set up without applying to an official body. However, if you want your organization to be recognized as a separate legal entity, you must apply for formal registration (i.e., incorporation). There are several types of unincorporated associations:

A club is the most informal type of unincorporated association and does not usually distribute assets to its members. A club is typically made up of friends or people with common interests.

A partnership consists of two or more individuals who have agreed to work together for a specific purpose. However, unlike an incorporated association, the organization does not have a separate legal identity and its members are therefore personally liable for any debts or lawsuits brought against it.

A trust is a private agreement between individuals or groups that allows assets to be collected and managed by an individual (the trustee) for the benefit of people or organizations (the beneficiaries). A trust can last indefinitely, as long as it serves its original purpose.


Can a Nonprofit Organization Make Money? Is a Nonprofit Organization Profitable?

Yes, a nonprofit organization can make money. In fact, it is required to make a surplus in order to stay in business and cover expenses.

A nonprofit organization’s mission should be clearly defined from the beginning so that members or donors know how much revenue the organization needs to generate in order to fund its programs. In other words, if an organization has a goal of operating on $100,000 per year and its realistic operational costs are actually $150,000 per year, it must either change its goals or find ways to generate additional revenue (e.g., fundraising events and other nonprofit funding sources).


The Importance of Business Planning for Your Nonprofit Organization

A non-profit business plan is a written document that provides an organization’s members, donors, and potential investors with information on:

  • The organization’s overall objectives and strategies for achieving its goals.
  • Who the target market is and how they will benefit from your products or services.
  • How much money do you need to start up and run the business until it is fully self-sufficient?
  • How you plan to raise the required capital and how much of your own money you will invest.

A business plan is a valuable business tool that lets potential donors, investors, or clients know that an organization is well managed and capable of achieving its goals.

Nonprofit organizations don’t have shareholders and therefore cannot issue stocks, but they do need to raise money in order to continue operating. They can do this through grants and donations from private individuals and organizations; government funding; charitable gifts; special events; or by generating a surplus.

Research conducted by the Nonprofit Research Collaborative shows that 55% of all nonprofits reported obtaining revenue by charging fees for goods and services. Furthermore, 21% of nonprofits reported generating additional revenue by “sale of products” and 33% by “convenience or opportunity” fees (i.e., opportunity to participate in a special event).

Nonprofit organizations can also raise money through investments such as stock purchases; membership dues; philanthropic gifts; and by selling assets. For example, some nonprofits rent out space in their buildings to community groups or businesses.

Nonprofit organizations must balance the need for revenues with the necessity of pursuing their social mission (e.g., providing services to people in need), so it is important to clearly identify which activities are essential to your organization’s mission and which are “nice to haves” that you can do without.

If an organization is struggling financially, it might have good programs but poor management or the wrong target market. A business plan helps an organization improve its management practices and stay focused on its key mission so that it does not waste time chasing after money from sources that will never provide the funds needed to cover its costs.


Nonprofit Business Plan Example PDF

Download our non-profit business plan pdf here. This is a free nonprofit business plan example to help you get started on your own nonprofit plan.

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