Let's get right to it!
When stripped back, a not-for-profit organisation (NFP), also sometimes referred to as a non-profit organisation or even a 'for purpose' organisation, is an organisation that has two key characteristics:
- it is established and continues to exist for a purpose beyond making money; and
- if it does make any profit (or surplus), it is retained by the organization to help further its purposes and, except in certain circumstances, is not distributed to the organisations members
By way of contrast, a for-profit venture is generally established with profit as its primary focus and may distribute profit to its shareholders, usually through the payment of dividends.
A not-for-profit organisation can be incorporated or unincorporated, big or small, may have employees and may be, but does not need to be, charitable in the legal sense.
One of the more common misconceptions is that by being not-for-profit, an organization is automatically a charity or somehow exempt from income tax.
Not true. Which is why it is a misconception, right?
To be exempt from income tax you need to be either a registered charity (we have an article on this coming soon!) or a type of not-for-profit that is permitted to self-assess as income tax exempt.
Other characteristics of a not-for-profit organisation are:
- it consists of members, not shareholders, and the members have no proprietary rights;
- it commonly (but not always) prohibits the members of its governing body, usually a management committee or board of directors, from receiving money, property or other benefit in their capacity as a member of that governing body;
- it has one or more objects or purposes (often of a charitable, environmental, cultural, sporting, industry or community benefit nature) that underpin the reason for its existence and shape the nature of its activities.
The structure and type of not-for-profit organisations and the scope and nature of their purposes and activities are extremely diverse and include:
- groups whose activities are "charitable" in the technical, legal sense – being directed towards things like social welfare, advancement of education, advancement of religion, human rights and protection of animals;
- sporting, social and cultural groups such as football clubs, staff social clubs and arts festival committees;
- universities, schools, hospitals and religious institutions;
- environmental foundations, cancer research institutions and community resource centres;
- associations of employees, business people or professional people formed for the purpose of protecting their mutual interests; and
- mutual benefit societies.
And that's about it really. There's not too much more to it.
To learn more about what makes a not-for-profit a charity, please keep an eye out for our article on registering a charity.